 Good evening and welcome to episode 343 of the Private Property Podcast. I'm your host, Uzaman Dongwa Khumalo. Welcome to the Friday edition of the Private Property Podcast. If you're joining us for the first time, welcome to it. You've chosen a Friday and a very exciting topic to join us for the first time. Welcome to the family. We're here every single weekday at 7pm talking all things property. We love helping you along your property journey and catering to all of your property needs. Remember to also go on to www.privateproperty.co.za, certainly to get a sense of some of the property needs that we cater to because you'll see we cater to all of them. Whether you're looking to buy, build, sell or of course looking for some advice, that is your one-stop shop for all things property. And to our regular viewers at home, welcome back. It's a Friday, so I'm back on your screens. And of course, I love, love, love hearing from you. 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And something else that's very easy, of course, is the whole host of different shows that you're able to tune into every single weekdays at 8 p.m. It's a Friday, so you can look to the home shoppers show that Chad brings to your screens every Friday and Mondays. So if you're in the market for a property or looking to see how exquisite properties look like in the interior, that is a show that you want to tune into. And if it's Tuesdays and Thursdays, Baalino Gop brings you the farming podcast and all things agriculture and Wednesday's SD classin brings the first time home buyers show for you on Wednesdays. And of course, this is myself every single weekday at 8 at 7 p.m. I am on your screens always having a conversation with a property expert who helps us make better property decisions. And that's exactly what we're going to be doing this evening. So do make sure you follow us across our social media platforms, private property, from your LinkedIn, your Facebook, your Instagram, Twitter, your YouTube, as well as on TikTok. You can follow myself as I'm doing an underscore on Instagram as well as on Twitter. Now, this conversation this evening, and I always admit this from the get go because every time we talk about this one, I like being up front and frank. We're looking at tax on rental income. And the one disclaimer I always say is firstly, I'm not particularly great at tax. I didn't study anything remotely close to understanding the accounting side and filling your tax returns. And I often berate tertiary institutions for taking us through a whole degree when you can even go up to master's level with the majority of degrees. And never be taught how to do your taxes. And I always say, well, if you don't teach me how to do these things, how are you expecting us to file our taxes? And I think it's probably one of those things that needs to be taught sometime in school, if anything, at a high school level. Because I think not everybody is going to go to the university, the college route, and the reality is some people even leave great man, they find work and going to have to contend with some other tax-related thing. So I've had to always get professionals to help me in this regard. And I think that's one of the things that already from the battle, say to everybody at home, who has rental property is don't do it yourself. That's the note we're going to start this evening's conversation on. But to help us get a bit of sense on our tax on rental income, I'm joined this evening by Vessel Robertson, who's a director at Irinstein from the Marva Attainees. Good evening, Vessel. And thank you so much for joining us on the show. Good evening, Zama. Thanks for having me. You know, Vessel, I mean, we were, I was telling you of it, exactly what I'm telling my peers around there. I am not particularly great at taxes. And I mean, I have multiple properties and, you know, you run your business and I always say, look, this is why we get professionals to do certain things. I remember when I started working, there was actually I think a two-year period when I didn't file my taxes. The first time I filed my taxes, it was on the last day and it was because my mother said, I haven't seen you talk about doing this. Why haven't you done it? And then the two years after that, I didn't because I thought, well, I mean, I see the deduction on my payslip. I didn't really see why we have to file our taxes. And I admit this because I think it's one of those things that many people probably also think when you don't have additional incomes in the early years, you're just like, okay, yeah, I see it. It's there. So why must we still continue to file for our taxes? But of course, we're looking at tax on rental income because this is a particular kind of case. I think first at a high level, when we look at how taxes, even tax on rental income is viewed, what are some of the basics and fundamentals that viewers at home need to understand about tax on rental income? Osama, I think you firstly hit the nail on the head. As they always say, there's two certainties in life and that's debt and taxes. So one would have thought that we would get a better education as far as taxes concerned in our lifetime. But I suppose it's sometimes, I don't know how the logic works behind the education curriculum, but let's leave that for people more intelligent than myself. But as you correctly pointed out, rental income is a form of taxable income from Saas perspective. And they obviously, they want their slice of the cake in as far as that's concerned. So I mean, when an individual rents out a property and he receives a rental income from that, that income would be subject to income tax. Now, I mean, residential accommodation can include an array of properties that's your holiday homes, your traditional bed and breakfasts, your guest house, even if you let out a room or a garden flat from your primary residence, that's also a rental income or similar dwellings to that extent. So from Saas perspective, if a third party pays you money for that, that is income in your books. So over and above, if you're a salary earner and you do these rental income as a side business, obviously your employer will already deduct the necessary pay as you earn and that obligations or tax obligations towards Saas. But once you do your annual tax returns, you would need to include this rental income to ensure that the books are all square at the end of the financial year. You know, Visel, we actually mentioned the other types of, I'll say rental properties that we sometimes have that I know people probably don't think to declare that as income and we'll get to that a little bit later on. You know, when you have, for example, your garden cottage or a room and I've seen different ways people find to not declare those taxes. I want us to look a bit later on in the show about what not to do in circumstances like that, especially now. I think if anybody has been seeing some of the activity, particularly from Saas, is that they are watching and they will collect their money, you know, and you don't want to be on the wrong side of the law where this one is concerned and later on, possibly, you know, pay all kinds of penalties. So that is something that we have to mention because I mean, a number of different kinds of groups on different platforms where, unfortunately, sometimes, landlords share tips that they should not really just circulate things, they should not be circulating. So I see it and I really want to say to my viewers that I do not do that. So then, Vaisal, when we look at, I want us for today's conversation, you know, and I was saying to you this too of a, I want us to concentrate a lot on people who have bought their rental properties in their personal capacities because I think a lot of us, myself included, when we started our property journey and still on the property journey, a lot of our rental properties or certainly the earlier purchases are often in our individual names and so that tax is, I mean, that income essentially adds on to whatever other incomes that we have and typically would be, let's say a nine to five and you work a normal job, perhaps just help us understand that implications of that additional income before we then even look at potential deductions because I know there are different ways where you then file your taxes and the expenses on the rental property. But I think some people at home don't understand that if you are, let's say, you know, a salaried worker and you are, let's say, the annual cost to company is 500,000, if you're then collecting 200,000 worth of rental, you know, in addition, then you're now in that, you know, in the 700K mark. And so sometimes if you even push up your, your tax bracket, just, just help us with that one because I think that, that's so, that's the, that we, we miss in the beginning that sometimes costs us money, unfortunately, especially if you move from the tax bracket, you were at, let's say you were on the slightly higher end of the previous one and now you're on the lower end of the next tax bracket and the potential cost where that could be. Zama, yes, that's it. I think that's an interesting one. And I mean, as you correctly pointed out I think most individuals who tend to, to lean towards property development normally buys their first property in their personal name. That in itself, it's, it's not a, it's not, it's not, it's not a right or wrong question. It's, it's completely fine. And I think it's a natural occurrence. You know, for the simple reason, you might contemplate to register a shelf company to buy your property. But the reality of the fact is, is that that shelf company has got no financial track record or history. You know, when you apply for finance. So in all likelihood, when you apply for finance, the banks will in any event ask who's the directors, who's the shareholders. And if they give you finance in that company, you will in any event have to sign surety. So, you know, whether or not that property is held in your personal name, you're still on the line for as long as you owe the money to the financial institution. I mean, there's various pros and cons. I think, you know, the biggest, the biggest problem actually when it comes to the tax implications, depending between your personal capacity and a company is more applicable almost when you sell the property and you've made a profit on it. Because then you then you move into the realm of capital gains tax. And, you know, the problem unfortunately, so where the property is held in a company or in a trust, the capital gains that is charged is exceptionally higher compared to capital gains in your personal name. Not to even forget about the added benefits that where you speculate with properties, but that property serves as your primary residence at the time you sell that property. There's a threshold where you are exempt from capital gains tax, 1.5 million, if I remember correctly. But I mean, owners needs to be cognizant of the fact that that rental income can potentially push you into the next threshold as far as the tax brackets is concerned. And that's then where we need to distinguish between the importance of tax evasion and tax avoidance. I think that's what we also touched on earlier regarding the questionable advice that was handed out in social media or on various forums. Now, I mean, tax evasion is illegal. There you are dodging sales. You are not claiming income you are supposed or not this claiming income or disclosing income you're supposed to do. And I mean, that can cost you much at the end of the line of sales was to get you on their radar. The more legitimate one and which is completely acceptable is, of course, tax avoidance, whereby you use the tax legislation and use, I wouldn't call it loopholes, but use the legislation as it stands to your advantage in order to allow for certain deductions from that rental income. And in that manner, reduce your taxable income to ensure that you stay in the relevant tax bracket to legally minimise your tax which is completely that's an accepted practice across the world. Of course, this evening, I see all the love that we're getting on our Facebook page, especially Petruinda is watching what I'm doing, saying that's my stream. I love everything about accounting. Well, rather you than me, but I, you know, when I finished accounting in high school, I did it as one of my subjects. I was like, Oh, good riddance, good riddance. But unfortunately, I have been countering it in postgrad. And I must say, I'm not, I'm not a big fan of having to do the work. So it's always good, of course, to see people who love it and it is their passion. I always say to people, always have an accountant as one of your friends because they certainly do come in handy. Howard McGatzane is saying the crux of the subject matter being taxation. And of course, this is a big one with property, right? Because you want to have a fundamental understanding of this. We talk a lot about what to do in acquiring a property, the research that you need to do, what you need to budget for, but also need to understand then the implications of having a rental property as much as possible. Because this is one of those things that you need to be on top of. And I like that Vistle even mentioned the difference between tax evasion and avoidance and some of the the deductions that you're able to get. And after the break, we're going to deal with that but just a bit, we're going to be dealing with that. As you can see, I'm getting distracted by some of the great messages that you have sent us and want to give certainly a shout out to so many of you on our Facebook page who are watching Bungalini, Bimabunda, Selanipile, greeting the family there, Sandy Stemmit also tuned in and of course, Justin Bartman is also watching absolutely loving all the comments and the love do keep it coming down here below. I want to find out from you at home, you know, are you on top of your tax matters? You know, sharing really onto the show that I have two years of missing to do my tax returns and luckily, this was very early on in my 20s. So there are no properties in the mix at all. And by the time I had to do my taxes, I'll say the third time was when I now, the fourth time rather was when I now actually had properties and had to file my taxes and my accountant picked up that, wait a minute, what happened those other two years? Because SARS is now asking about those other two years when you didn't do your taxes. And I had to say, look, there was nothing to declare. I didn't think I had to do anything because, you know, SARS was being paid. And I think that's some of what a lot of us in the early days who start working and you don't have an additional income may sometimes think. I want us to go for a quick break and we'll come back. We'll look at, you know, the difference between tax evasion and avoidance as Vissel has mentioned it. And then of course, what some of the, you know, deductions that you're able to probably factor in or the different ways that are involved when we talk about tax avoidance. Let's go for a quick break and see who the potential winner of our cash prize is this evening. I hope they're watching and can claim their prize. I think it could be such a great way to end off the week and certainly kickstart your weekend. And the lucky winner this evening is Omkulu Nguenya. Omkulu Nguenya. If you are watching us this evening, do make sure that you claim the cash prize that's Omkulu Nguenya. I think the money bag, how much is it sitting at Biala? I think it's, is it sitting at 1,000 rounds? It's sitting at 500 rounds. So that's 500 rounds in the money bag. So Omkulu Nguenya, if you are watching it, do drop us a text down here below and claim that cash prize this evening. And if you want to be just like Omkulu Nguenya, all you have to do is to comment on the pinned post on our Facebook page. And of course, you stand a chance of walking away with that 500 rounds cash every single evening. And if we don't have somebody who claims our money, the money goes into the money bag and the money bag just keeps on growing. So Omkulu Nguenya, let's see if you're watching us and if you're going to be able to, you know, kickstart your weekend with that cash. This evening, we are talking about tax on rental income. I'm joined by Vissa Robertson. Who's a director at Edelstein from the Madover Attorneys. And before the break, I was talking about the difference between tax avoidance and, or mentioned rather, you know, that these tax avoidance and tax evasion, and as we know, tax evasion is not legal. I think Vissa, you know, at a high level, let's see what is the difference between the two and let's explore what then the, we'll say the loopholes are the great areas where you're able to use the law or the, you know, the legal parameters to your advantage when we talk about tax avoidance. Zama, I think on a very high level, the simplest example I can think of as far as tax evasion is concerned is to use the simple example of a tenant paying a landlord cash for his monthly rent and the landlord, obviously not banking that money for purposes of avoiding a paper trail or banking records. And as such, you know, it's out of sight, out of mind scenario, you know, I suppose it's very difficult for source to pick up on cash transactions. And as such, you know, you are pocketing the entire income and you didn't disclose it properly. And as such, you know, you're not paying source what is due to them. And I think that is a clear cut example as far as tax evasion is concerned. Now, tax avoidance, you know, because that's the legal method, you know, I think source is at least somewhat realistic to say, listen, the income doesn't just fall out of the sky. You needed to incur certain efforts or you needed to incur certain expenses to ensure that you can recover that income. So in order to be just and equitable, we will allow you to deduct those expenses that have been incurred in the production of income in order to reduce the net rental income that you earn, which in turn reduces the net taxable income on which you are taxed at the end of the financial cycle or year. So that's your tax avoidance on a high level. So like I said, specifically for the production of rental income, I think the most important distinguished point of distinguished that we need to make there is that it doesn't relate to improvement to the property, a capital expenditure on the property. So where you improve the asset and you build on an extra garage or you build a swimming pool, that's obviously high capital expenses and can fairly quickly diminish any rental income you received in a financial year. So SARS would say that's not a deductible expense in all likelihood in future that will in any event give you the opportunity to earn a higher rental income because of those improvements on the property. So it's to your advantage in the longer scheme of things. So, but as far as your traditional expenses is concerned, you know, that's all fair play as far as SARS is concerned and that's wide ranging as well. I think if we look at the most simplest expenses on a rental property, your rates in taxes that you pay towards the municipality, that's a deductible expense. If you live in a block of flats and there's a homeowner's association, the levies that you pay towards the body corporate, that's a deductible expense. If you made use of estate agents to advertise the property, to find a suitable tenant, that's a deductible expense. Simultaneously, you need to protect that asset against fire or theft or water damage. So you need insurance. Insurance is a deductible expense. Your garden needs to be maintained, that's a deductible expense. I think one of the most important deductible expenses that people tend to forget is the interest on your bond. On the bond, yeah. 100%. So that's also an expense. That's money you're borrowing from the bank. You're paying them interest on that money and that's a deductible expense. And I mean, that normally equates to a very interesting debate amongst property developers because I think normally most of us was taught you need to fear debt, you need to avoid debt and if you have debt, you need to pay that debt off as quickly as practically possible. But from a practical perspective, considering tax deductibility, that might be your detriment. For the simple argument, if I buy a property cash, so I don't owe the bank any money, that's less expenses that I can deduct on a monthly basis. However, if I have my bond and I've got the interest I'm paying monthly, I can deduct that interest from my taxable income. So theoretically, there's not really an incentive for you to settle your bond sooner than what is necessary in order to maximize the benefit that you can achieve from that deductibility of the bond interest. And going to your questions and comments at home as we're talking tax on rental income with Vessel Robertson who's a director at Edison for the Marlborough Attorneys and the Adams, I am sure you're covered now and they were saying, thank you very much for an informative session. Please show all the advice about tax avoidance. We've certainly, Vessel has given us a really great breakdown of some of those deductible expenses that we should be aware of and also what doesn't constitute a deductible expense because I think a lot of landlords want to upgrade their homes and you'll sometimes get a contractor in who inflates the scope of the work because you think, look, I'll be able to have this as one of my tax deductibles. Unfortunately, it doesn't quite work like that. And we've also got here Rochelle Avidi saying, I'm honored to have a boss like Vessel. I learned a lot from him. Thank you, Vessel. So that's somebody who works with Vessel there at the law firm. And we've got Howard Magazzani here on Facebook saying, your best bet is to only slightly go on shortfall and declare losses. Your rent can be less than the repayments, refinance any property with high surpluses. So that probably speaks to how you structure it, right? And I think it's a... I see Vessel, do you want to come in there with a comment? I can't already see. You're itching to come in on this one. Yeah, that was an interesting comment there from the viewer. Look, I think a lot of people wrongfully have the impression that you can just for years on end incur this multiple amounts of expenses and, in such a way, reduce your taxable income. You know, unfortunately, I don't think it's as simple as that. SARS makes use of what they refer to as anti-avoidance measures, specifically for these type of practices as far as rental income is concerned. So, you know, that's an intricate piece of legislation. We definitely don't have enough time to go into detail as far as that's concerned. But on a high level, what SARS would do in those circumstances, if you year on year record losses on your property, you know, SARS would come in and say, listen, I think what's going to happen is we're going to ring fence your losses as far as this property is concerned. You're not going to be allowed to offset it against the remainder of your taxable income. If ever in future, you have a taxable income on that rental property, by all means, set it off against the ring-fenced losses, but you can't have these losses year on year for the lack of a better description, artificially reduce your taxable liability towards SARS. I think that's also, like I said, it's an anti-avoidance measure and on another level, a similar form of tax evasion. We had a great question from Umea Ziboutelesi asking, where do you report landlords transacting in cash with no receipts? You know, we're talking about this. You're mentioning this earlier, that part of how people, landlords in particular evade taxes by using cash with their tenants and obviously not declaring it. So where would somebody go to report a landlord who does this? Some of that's, once again, a difficult question. I think the mere fact that you mustn't put the cart before the horses. The mere fact that a landlord collects the rent from you in cash is not in itself, you know, prima facie proof that he is avoiding tax. For all she knows, he hop skipped and jumped right straight to capital, right after that to deposit that money into his bank account and there's a proper paper trail as far as that's concerned. So I would be careful to make unmerited assumptions as far as that's concerned. But assuming you've got all your ducks in a row and you've got the necessary facts, I mean, normally once you have a rental agreement, it's obviously preferred to have a written rental agreement in place. There's nothing wrong with a verbal agreement, but I would normally advise clients, you know, it's always difficult to dispute a verbal agreement in a court of law. So the written agreement, you know, remains stride as far as I'm concerned. So normally in a written agreement, you would have the information insofar as it relates to the landlord. And if you suspect your landlord of tax evasion, I'm pretty sure your nearest source office would find that information valuable. And I think insofar as you've disclosed it to them, you've complied. Well, there's no legal duty on any individual of South Africa to report the crime, but be it as it may, once you've reported that, I'm sure they will investigate that. I think you would probably be wasting your time going to the closest police station. The police station would say that's a civil or a commercial crime matter. It falls outside their jurisdiction. So I think that would be your best line of approach. Visel, I'm going to ask you something that I've heard a landlord say before and upfront to their defense, I'll assume that they were not doing it to be malicious or to evade tax. And I know it was very early on also in their own property investment journey. And so what this particular landlord had done is they have a normal nine to five job and they had bought, I think it was one or two rental properties at the time. And they obviously have their primary bank account that they transact with on a day to day basis. But then they went and opened another bank account also in their personal capacity with a different financial institution that they wanted to use to collect the rental. They just didn't want to conflate all the rental money with their everyday money. Nothing wrong with that. Come tax season, they submit their tax returns and they had not declared firstly the income from the rental properties. And I think to their surprise, SARS came back saying, hey, but you have this other bank account with this other financial institution, we're seeing it here. And we know that you actually have other properties because we're seeing it here. So it's not, you've got three properties. So what's happening with these other two? Are there incomes? If there are, is it in that other bank account? Just talk us through that because I think sometimes we're then naively so because I can only position it as you're being slightly naive because SARS obviously has access to the number of bank accounts one would have. So if you're naively thinking, SARS won't know that you've got a bank account with financial institution X and Y and potentially collecting the additional income, the other one and not your sort of day to day one, help us understand that one. Because I think, like I said, I'm going to assume they're not trying to evade tax even though I know some other tips to say, just open another bank account, have that money go in there and the bank account you communicate to SARS via this bank account, they're not going to find out that there's another bank account that has these funds. I think let's dispel that because newbies make this error and there's some perhaps because of ignorance but some because they think they can evade tax in that way. Zama, yeah, that's a difficult question for me to answer. I've never been employed within the offices of SARS so in so far, their intricate workings is concerned. I'll be speaking as a complete layman and it will be thumb sucking from my side but I think the reality is what people tend to forget is when we buy properties, records of that get registered with a deed's office. I mean, there's an official public record of you owning a property. You cannot hide the fact that you own an immovable property in the Republic of South Africa. You can do some fancy legal footwork and register it in a company which shares of the company is held by a trust and you're the beneficiary of the trust. That's all good and well, you can put various layers between yourself and the property but there is an official public record as far as that property is concerned and I think it becomes even more problematic where you are the owner of multiple properties. Then especially you are on SARS radar. I mean, I'm sure they target specific net worth individuals as far as they feel that that's the most likely possibility of them recovering taxable income and if SARS, I don't believe it would be too difficult for them to do that type of audit or a lifestyle audit and come to the conclusion that you own three, four, five multiple properties yet you are accumulating year on year losses or it's not even reflecting. I see you've got a 95 job. I see you've submitted your payers, you earn all your tax returns for value or financial manager at the work. That's all good and well but there's these two, three other properties. I think SARS will find it strange that you've got two, three other properties and there's no income coming in from that. I mean, I don't think the average person has got the luxury of being in that position to maintain the financial responsibilities yet not having any financial income derived from that. So I think that would be the type of red flags on SARS side and that would also depend on what the audit outcomes would have been in previous years on your tax submission but that's, I would call that an educated guess from my side. I'm yet to see the intricate workings of the SARS office. Yeah, and Viceroy, I think one of the things that I also realized, I only started getting audited by SARS after getting the properties. So prior to that, I think I submitted that once. We missed the two years. The moment I got the properties, then started getting audited and I think the benefit was because I worked with a professional who did the work, it was easy then for me to manage and it's always a clean audit and they're happy with it. So you do also need to understand that the moment property comes in, they will scrutinize what you have submitted and if, as Howard was leading to earlier on or pointing to earlier on, when you want to rather declare a loss, they will audit to actually get a sense of is it in fact a loss or are you thumb sucking? They'll want to see all the proof that you're submitting as far as the calculations that you've also made. So those things are always important to pay in mind. But Viceroy, as we wrap up this evening, any tips for our viewers at home who obviously have rental properties when it comes to handling their tax affairs on the income on their rental properties? I think Zama, in summary, when it comes to property ownership or multiple property ownership, there's an array of factors that needs to be taken into consideration. Obviously, tax is just a small piece of that. There's questions to ask regarding security or how do you protect your assets in the situation of an insolvency or a sequestration or from a state law when you pass away. What is the best structure to hold your assets in to also minimize your tax obligations at date of death and ensure continuation of your assets to the fellow business owners or fellow family members? So you've alluded to it during this entire podcast and I think I agree with you. It's with imperative importance and I always say focus on your strengths and all your weaknesses. It's imperative to get accountants on your side. It's imperative to get legal professionals on your side. I mean, it's always from the accountants and the lawyer side. People are quick to complain about an expensive hourly tariff, but I think that's a small price to pay to sit with such a professional for an hour or two or three and make sure your affairs are in order compared to not doing it and having to pay excessive school fees and having to battle with SARS or other issues at a later stage. You know, it's easier to do things right at the beginning as opposed to having your accountant or lawyer coming in after the fact and play proverbial janitor in trying to clean up the mess that's occurred. That's normally a much more expensive exercise. That's all that's where we're going to leave it at this evening. Thank you so much for joining us on the show. Thank you very much, Zama. And that is Vistle Robertson, who's a director at Edelstein for the Madover Attorneys wrapping up the Friday edition of the Private Property Podcast with myself, Ozama and Dunwoa Kumailo. The team has let me know that Kulungweya unfortunately did not claim that 500 Rens and so we're going to have a roll over and of course 1000 Rens is now in the money bag for Monday evening. That's where we're going to leave it this evening. It has been a pleasure to be with you this week. You can look forward to the Home Shoppers show with Chad at 8 p.m. I'll be back on the screens on Monday at 7 p.m. Hope you're going to have a great weekend and as usual, hope you'll be staying home and staying safe.