The Urban Development Zone incentive can accelerate inclusive growth in the central city, and has applications for both residents and developers. We break it down for you here.
One of the Cape Town Partnership’s most ambitious goals is to bring the people of Cape Town back into the central city to live, play and work through appropriate residential and business densification, affordable housing and mixed usage buildings. However, government planning as well as private sector investment is essential in creating conditions for this goal to be realised – the keyword being “partnership” after all.
The Urban Development Zone (UDZ) in the City of Cape Town is such a partnership opportunity that can accelerate this kind development in the central city. Introduced in 2003, the UDZ is a tax incentive that is aimed at revitalising inner city areas by attracting capital investments in commercial and residential property through a tax rebate.
What is the UDZ?
In simple terms, property developers and owners can earn significant tax savings by doing any of the following in demarcated UDZ areas in Cape Town:
- Erecting, extending, adding to or improving to an entire building
- Erecting, extending, adding to or improving a part of a building covering a floor area of at least 1 000 m²
- Purchasing a building or part of a building directly from a developer – provided that certain requirements are met.
The table below, sourced from a presentation from National Treasury, notes the varying allowances linked to new buildings, improvements as well as extensions and additions to existing buildings.
The UDZ and developers
An example of the UDZ being used in the central city is the Portside building development, now officially Cape Town’s tallest building. Built at a cost of R1.6 billion, the owners were able to write off 20% of the building costs in year one and 8 % a year in the remaining 10 years for income tax purposes.
FirstRand, RMB and Old Mutual, co-investors of the Portside development, cited the tax savings acquired through the UDZ incentive as one the reasons why they committed to investing in the central city.
While the UDZ incentive has spurred increased investment from the professional property sector in the central city – with R2 billion worth of new construction undertaken and R1.16 billion refurbishments – it’s important to note the UDZ applies to the ordinary property owner in the central city as well.
The UDZ and homeowners
For example, Sithembinkosi is a father of two and owns a house in the demarcated UDZ zone in the central city. He would like to refurbish the house for R1 million and build a granny cottage for R200 000 so that he can rent the granny cottage out to augment his income.
What does this mean from a UDZ tax incentive point of view?
- Sithembinkosi cannot apply for the costs of refurbishing the main house, since he lives in it, so only the costs of the granny flat (as a new development to his property) can be claimed in terms of the UDZ incentive.
- Sithembinkosi can claim the depreciation related to the new building work: 20% of the costs in the first year, and then 5% of the costs for each of the next 11 years.
- Thus R40 000 in Year 1 and R10 000 in each of the 10 years thereafter.
The abovementioned example provides ordinary house owners in the central city with the incentive to make substantial improvements to their homes, thus creating possibilities for a housing mix that allows low rentals in the central city, on the properties of ordinary house owners.
9 steps to apply for the UDZ tax benefit
- Read the SARS Guide to the UDZ Tax Incentive.
- Check if the intended development, purchase or extension of residential and commercial property falls within the demarcated areas in the City of Cape Town.
- Ensure that the planned development or refurbishment is approved by the City of Cape Town’s Planning, Zoning and Building directorate. For more information on this process, read here.
- Once the plans are approved, complete the intended building or refurbishment.
- Keep a good record of all the costs (including receipts, invoices etc.)
- Apply for the Certificate of Occupancy from the City of Cape Town. This certificate is issued once all of the building work is completed – the building may only be used once the Certificate of Occupancy has been issued.
- Fill in the UDZ 1/2/3/4 application form (obtainable from the SARS website).
- Complete the standard annual SARS income tax return, stating all income and claiming expenses. Indicate separately on the income tax return which amounts were spent on UDZ construction or improvement.
- Submit the annual tax return to SARS along with the following documents to qualify for the UDZ tax incentive:
- Certificate of Occupancy
- Copies of all of the recorded expenses for UDZ construction and improvements
- SARS UDZ claim form
UDZ for an inclusive city
In a previous article on the UDZ and urban regeneration, former Cape Town Partnership programme manager (now programme facilitator at the Western Cape Economic Development Partnership), Jodi Allemeier noted the potential of the UDZ if used as a tool to undo the spatial legacy of apartheid South Africa in the central city.
Jodi argued that while the UDZ incentive is important in accelerating urban regeneration and development, its ambit needs to be seen in a broader context, which includes changing zoning schemes, social housing subsidies and a range of other tools that could assist smaller property developers and owners, and not just the big players.
Beyond the shiny and vertigo-inducing commercial property developments, the UDZ could be an important tool to incentivise large property developers in particular to develop innovative low-cost housing in the central city.
A developer could utilise the incentive to transform what used to be a run-down neglected office block, to a dual commercial and residential block, catering for low-income rental tenants.
Additional reading on the UDZ Tax Incentive
- Urban Development Zone 2020: Inclusive urban regeneration? asks Jodi Allemeier
- Guide to the Urban Development Zone (UDZ) Tax Incentive on the SARS website
- The Central City Improvement District presents State of the Central City Report 2013
- Urban Development Zone Tax Incentive Presentation by the Department of National Treasury