Landlords Beware: Failure to Declare Rental Income Can Land You In Hot Water with SARS

As a landlord in South Africa, it is crucial to understand that any rent received from your investment property must be declared as income on your tax return. Failure to do so is considered tax evasion, which is a crime punishable by a hefty fine or even a prison sentence of up to five years. It’s also important to note that SARS has improved its tax collection efficiency, making it increasingly difficult for non-declaration or under-declaration to remain undetected.

However, there is some good news for landlords. All expenses related to the letting of the property can be deducted from the gross rental amount received when calculating the taxable amount of income. These expenses include interest paid on a bond, homeowners’ insurance premiums, municipal rates, repair and maintenance costs, and levies.

If you’re retired and not earning any other income, there’s a chance that your rental income may fall below the tax threshold for your age group, resulting in no tax liability. However, as a landlord, you still need to submit a tax return to avoid administrative penalties.

It’s important to seek the help of an accountant or tax consultant if you haven’t previously declared your rental income. South African tax law allows SARS to issue tax assessments based on estimates to people who regularly fail to submit returns, which can result in penalties and interest on unpaid taxes.

Rent received from residential accommodation, such as a holiday home, cottage, or subletting part of your house, is subject to taxation and is added to any other taxable income you receive.

Expenses related to the rental of the property, such as bond interest, rates, and taxes, property levies, estate agency fees, homeowners insurance, garden services, repairs, and security, can be deducted from rental income. However, capital and private expenses won’t be considered deductions by SARS. Improvement costs are a capital expense and will be included in the base cost of the property, reducing the capital gains tax payable to SARS when the property is sold.

If expenses exceed rental income, the loss can be offset against other income received by the landlord. It’s always best to consult with an accountant or tax specialist to fully understand what is deductible and how much tax will be paid over the annual lease period.

In conclusion, while the taxation of rental income may seem complicated, leasing a residential property is still a financially sound way of adding to your monthly income stream, with the added benefit of owning an asset that will appreciate in value over time. It’s important to ensure that all tax obligations are met to avoid penalties and ensure compliance with SARS and South African taxation laws.