Tax relief came in several forms in yesterday's budget, and property developers and investors will benefit from an extension to the urban development zone initiative.

Executive mayor Amos Masondo signs the Inner City Regeneration Charter

PROPERTY developers and investors will be able to get tax relief on inner city developments for another five years. Minister of Finance Trevor Manuel made the announcement in his 2008 budget speech, "to enable the private sector to play its part in developing our inner cities".

Manuel gave his budget in parliament on Wednesday, 20 February. The initial urban development zone (UDZ) initiative was promulgated in 2004, and the tax relief was intended for a period of five years only. However, the 13 cities in which UDZs were legalised have been struggling with the complexities of the process and investors have complained that the period was too short.

Johannesburg is the only city that has been able to get the UDZ tax incentive successfully on the road.

"To date, we have investment in the inner city of R3-billion on our records," confirms Lebo Ramoreboli, the acting programme manager of spatial economic development in the City. This constitutes investment from developers who have already started refurbishment and building projects, and those registered with the City and planning to start projects in the near future.

Intensive marketing
Ramoreboli attributes this to the pro-active approach Johannesburg adopted from the start. The City spends more than R2-million a year on marketing its UDZ and has the "full commitment of the mayor and council". "Other cities have not yet achieved high investment, and some are still gearing up."

The formal adoption and financial commitment the City has made to the Inner City Regeneration Charter has also contributed to investor confidence. In turn, the private sector in Johannesburg has been very supportive of the City. "They are very involved," Ramoreboli points out.

The tax incentive encourages businesses to refurbish existing buildings or to build new assets in the inner city and to offset the cost of the development against the taxable income of the company. Since 2004, over 100 projects have been completed at a total value of about R1-billion in the Johannesburg inner city.

UDZ developments include Turbine Square and Turbine Hall, the Mills, the Standard Bank Parkade and the BHP expansion. And a recently completed inner city buildings database confirms that there are more than a thousand buildings with the potential for renewal, Ramoreboli confirms.

In 2006, the legislation was improved to make the incentive more inclusive to marginalised groups, with the focus on bringing the youth, women and black economic empowerment companies into the UDZ fold.

Not too taxing
Ramoreboli says the tax incentive gives investors greater control over their bottom lines and the overall success of their businesses, while the City, in turn, can deliver on its inner city rejuvenation mandate.

Once a property or land that falls within the UDZ boundary has been purchased, the developer registers with the City for an accelerated depreciation allowance. On completion of the development, the City issues a location certificate that the developer attaches to the company's tax return.

Under normal tax conditions, depreciation of assets is tax deductible but may only be claimed over an extended period of time, usually based on an estimate of the useful life of the asset. With the UDZ tax allowance, the amount of depreciation of the fixed asset is taken as higher in the first years of the asset's life, thereby reducing the taxable income of the investor during the early years of the investment - referred to as accelerated depreciation.

For a developer refurbishing an existing block of flats, the deduction is 20 percent of the investment each year for the first five years following the completion of the development. For new buildings, the deduction amounts to 20 percent of the construction costs in the first year of operation and 5 percent annually in the following 16 years.

And the benefit extends to first purchasers of developed or renovated buildings. Developers constructing or refurbishing a building to sell it on do not qualify for the tax incentive. Instead, the first purchaser can claim the tax incentive on a percentage of the purchase price deemed attributable to the cost of the refurbishment or construction.

In the case of a new building, this is 55 percent of the purchase price; for a refurbished unit, 30 percent of the purchase price is considered. Only the first purchaser of the sectional title or building may benefit from the tax incentive.

Despite the fact that there is some unhappiness among developers about this ruling, Ramoreboli feels it benefits individuals who may not otherwise be able to participate. "By the same token, it has given opportunities to small investors, specifically in areas such as Hillbrow and Berea."

One such building is the Parktonian Hotel in Braamfontein, which has sold about half of its suites to individuals. "The City wants to encourage more small time investors, more women, the youth and black economic empowerment."

Extending UDZ boundary
Johannesburg has seven UDZ areas in the inner city but would like to extend the boundaries as investors have shown much interest in areas falling just out the zone. It has brought a formal request to the Treasury regarding expanding the area.

And the economic department recently appointed a consultant to look into the extension of UDZ boundaries. "[The consultant] will determine what precincts are performing and the reasons for this; that is, what attributes to their performance." Likewise, those precincts not performing will also be studied.

Johannesburg and Cape Town were the first two cities to benefit from the UDZ tax initiative. Since 2004, the Treasury has registered another 11 UDZs, located in the municipalities of Polokwane (Pietersburg), Nelson Mandela Bay (Port Elizabeth), Msunduzi (Pietermaritzburg), Ekurhuleni (East Rand), eThekwini (Durban), Tshwane (Pretoria), Buffalo City (East London), Mbombela (Nelspruit), Mangaung (Bloemfontein), Sol Plaatje (Kimberley) and Emfuleni (Vanderbijl Park).

For more information on inner city initiatives and investor support, visit the Johannesburg Central, Kagiso Urban Management, or Central Johannesburg Partnership websites.

For more information on city improvement district (CID) success stories in the inner city, visit the Braamfontein, Newtown, Johannesburg Central retail, or Johannesburg Central southwest websites.

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