Question:

My dad wants me to stay in his second property. I will live in it with three others who will pay me a nominal rent. This will go principally towards all house costs which I will cover and the remainder will provide me with a living allowance while I study.

What are the income tax implications for my dad and me?

Answer:
Any person who receives rental income from a property owned by them must declare it for income tax purposes. Even if one does not receive it into one’s own bank account, SARS will regard it as deemed income.

There are, however, some deductions against the rental income that are allowed. This would be any maintenance on the building as well as the rates (or levy) and could include the water and electricity accounts, depending on the lease agreement.

As a practical example, if the water, electricity and rates totalled R1000 per month and the three people contributing to the rent each paid R1000 per month, then the net amount of R2000 per month (or R24 000 per annum) would be added to the home owner’s taxable income and he/she would be taxed on it at his/her normal rate of tax.

If the owner is married in community of property, then half of all net rental incomes will automatically accrue to his/her spouse.

In the above example, only R12 000 per annum would be added to the owner’s taxable income, and R12 000 per annum would be added to his/her spouse’s taxable income. If one spouse earns less than the other, then his/her tax rate will be lower and the tax impact on the family will be less.

If he/she doesn’t work and this is his/her only income, no tax will be payable as this income is under the tax threshold (the minimum amount you must earn before you have to pay tax) of R46 000 per annum for persons under 65 or R74 000 per annum for persons over age 65.

The income actually retained by you would be viewed as 'pocket money' given to you out of your dad’s post tax income, so it wouldn’t be taxable in your hands at all.

The plan as proposed by your father is actually a good one from a financial planning viewpoint. It will allow you to work within a budget and take on the responsibility of collecting the rent, paying expenses and being careful with your purchases. This is a wonderful learning curve to accompany your studies.

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals’ personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.

If you would like acsis to put you in touch with an independent financial planner, click here!

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