Developing or acquiring a hotel, lodge or student residence accommodation?
Section 12J of the Income Tax Act (“the ITA”), is about to get extremely interesting if you are looking to acquire or develop a hotel, lodge or student residence accommodation. Effectively, section 12J can provide a discount (in the form of a rebate) of between 28% to 45% on your investment into opportunities that fall within the ITA’s definition of ‘hotel keeper’.
In addition to other standard requirements of Section 12J, to qualify for the rebate, the investment (acquisition or development) must fall outside of the definition of “impermissible trades” under section 12J (1)(b). An extract of Section 12J (1)(b) reads as follows:
An “impermissible trades” is “any trade carried on in respect of immovable property, other than a trade carried on as a hotel keeper”.
Section 12J (1)(b) prohibits immovable property investments made by a Section 12J Venture Capital Company, unless the immovable property is utilised in a “trade carried on as a hotel keeper”. To understand the requirements of the definition of “hotel keeper”, one would have to consider Section 1 of the ITA which defines a “hotel keeper” as:
“any person carrying on the business of hotel keeper or boarding or lodging house keeper where meals and sleeping accommodation are supplied to others for money or its equivalent” (emphasis added).
Taking into consideration the above definition as well as a binding private ruling issued by SARS, the following requirements are necessary for an investment to meet the requirements of “hotel keeper” in terms of the ITA:
- The investee company must carry on a business in the hotel, boarding or lodging sector;
-a meal service;
-sleeping accommodation; and
-levy a fee for its services.
The above indicates that, if structured in the correct manner, the following investments opportunities can effectively attract the tax rebate associated with Section 12J:
- Student accommodation;
- Guesthouses; and
- Serviced apartments.
How to access the tax rebate?
In order to access the rebate, a Section 12J Venture Capital Company needs to be formed and all investments by the Section 12J Venture Capital Company into the “hotel keeper” asset/s needs to meet certain requirements.
If you are looking to develop or acquire a hospitality asset, we at Jaltech offer complete Section 12J Venture Capital Company formation, administration and management services.