Do I need an accountant for rental income in South Africa?

Anyone, whether a South African individual or legal entity such as a trust, as well as any foreign individual or entity, renting out property needs to make the declaration in their tax returns.

For foreigners, there are double taxation agreements, but invariably the location of the property triggers the tax focus.

Even if you don't owe tax, you still need to file a tax return to avoid a penalty.

The rental income you receive should be added to any other income you may have. This means, if you’re in the 31% tax bracket, you will be paying 31% income tax on all income made from property rentals.

If you’re earning rental income, it might happen that your extra income might push you into a higher tax bracket.

Tax laws are complex and should you decide to ignore and rather keep quiet about your rental income, the Tax Administration Act contains very stiff penalties for tax evasion (which is illegal).

Penalties go up to 200% of tax you should have paid.

The fines can go up to 200% of tax that should have been paid. In addition to penalties, interest is also levied from the date you should have paid the tax obligation.

You should seek the help of a tax consultant, if you haven’t previously declared your rental income, to fix the situation with SARS.

You should contact a tax accountant for advice when deciding to become involved in rentals. "We recommend in all cases that landlords and homeowners have an appointed registered accountant as soon as they start renting out their property," advises Vinesh Singh of the Singh and Singh Accountants.

"An individual taxpayer may hire an accountant annually during the tax season to assist with compilation of profit or loss statements. Companies with commercial or residential properties are recommended to have accountants on retainer for advice and management accounts reports,” suggests Zamani Khwela, senior financial consultant and business analyst at Zanokuhle Consulting, one of the top-rated firms on Procompare.

Not only will the ideal accountant assist you in preparing your taxes but also help you to optimise your tax in terms of minimising your possible liability and optimising the timing (for example when selling your property). This will help you with your short term as well as long term tax planning.

• Compliance: Registered accountant ensures adherence to SARS regulations and accurate rental income declaration.
• Tax optimization: Tax consultant identifies rental-related tax deductions and estimated tax position before the tax becomes due.
• Time savings: Accountant manages finances, especially for multiple rentals, freeing your time.
• Strategic advice: Accountants are able to help landlords and homeowners navigate the financial and tax laws and advise on the incentives of different types of properties.
• Peace of Mind: Chartered accountant offers confidence in financial management and prepares for growth.
• Insights: Having a full expert understanding of the costs and income can also assist the landlords and homeowners to justify rental increases.

When renting out property, with the intention of generating a profit, all expenses incurred in generating the rental income may be deducted from the rental income.

Each landlord or homeowner’s situation is different, but the guiding principles of deducting expenses for renting property are:

• Interest on bond (related to the property or portion of property rented)
• Non-life insurance
• Rates & taxes
• Running cost of the property
• Maintenance of the property (fixing like with like)
• Small assets or improvements below R 7000

“Many homeowners and landlords tend to not keep the low expense items invoices and these may go unnoticed which could have substantially reduced the tax burden if any,” underscores Singh.

There is nothing to prohibit you from showing a loss on your tax return, and it is normal to expect in the first few years of a rental undertaking to show a loss. This is especially true if there is a bond, considering the current high interest rates.

There are rules in terms of long-term losses whereby SARS can ring-fence the losses, which simply means it is carried forward until a taxable profit is made.

“Many taxpayers make the mistake of not declaring the losses, thinking they cannot do anything with it from a tax point of view. This is a huge missed opportunity and definitely consulting an accountant before starting with the process of getting involved with rentals can be very beneficial,” clarifies Olën.

Always tell SARS about the income, and then look for expenses to reduce the tax.

The basic rule should always be to tell SARS about the extra income you have earned, and then look for allowable expenses to reduce the tax.

If the situation does arise where SARS queries undeclared rental income, it is important to do two things:

1. For the history of the rental income, identify all the related expenses. Maybe you did not declare the income, but you never declared the related losses as well. The net impact may be a reduction of payable tax or may even result in a benefit. This is highly dependent on each taxpayer’s situation.
2. Contact an accountant to assist you to navigate the process. It is important to then ensure that all the cards are put on the table to enable the professional to assist you effectively.

“We recommend declaring all income to SARS, even physical cash received, as SARS has access to your bank accounts, department of home affairs, masters offices and company’s commissioners office,” warns Singh and adds it is highly advisable to contact your accountant or appoint one if you do not have one, to help you navigate through this situation.

If SARS has not yet contacted you, there are different processes to assist you with bringing your affairs back in order: for example, Voluntary disclosure programmes or Request for correction of tax return. Waiting for SARS is never a good policy.

The key thing to remember is to keep adequate records. --Lars Olën, Digi Accounting

What are some other tax consequences of renting a property?

Tax consequences of renting property could include:

• Income tax – where the net income or loss from rental activity should be considered;
• Capital gains tax – profit or loss on sale of property which was rented or partially rented;
• Unemployment Insurance (UIF) & Pay-as-you earn (PAYE): which becomes relevant where staff are hired to assist with the running of the rental establishment;
• Value added tax – which is dependent on what type of property is being rented out.