Question:
I am renting out property for R12 000 while the bond payment is R6000. After paying the rates, water and electricity I make a profit of R2500.

What are the tax implications of paying this profit into my bond? Does SARS take the R2500 as a taxable profit or as a bond payment?

Question:
With the final submission date for filing tax-returns via SARS e-filing having come and gone, tax matters certainly seem to be on all our minds!

When looking at an income tax issue it’s always useful to go back to the basics:

In the process of arriving at a taxpayer’s taxable income, the first step is to look at his or her gross income. This should include all sources of income for the tax-year (except types of income that are specifically excluded in terms of legislation). Types of income might be a salary, investment income, business income, etc. Rental income certainly does constitute a source of gross income which will need to be declared and which will be added to all other types of income the taxpayer may have received in a tax-year.

Secondly, certain exemptions may apply which will be deducted from the declared gross income. As the term implies, these are certain types or portions of income which are not subject to taxation at all. An example would be local dividend income which is totally exempt from income tax. As far as your rental arrangement goes no exemptions apply.

As a third step in the process a number of deductions may be available to be made against income which serves to reduce the income and arrive at the final amount of taxable income. The rationale is to allow all the expenses that were incurred to produce a certain type of income to be deducted. An expense or loss will be allowed as a tax deduction if it meets the requirements set out in the Income Tax Act. If the expenses you incurred were instrumental in the production of your rental income it may serve as a deduction.

Payments of rates, water and electricity are the type of expenses that may be incurred to enable the owner of a rental property to earn the rental income. The repayment of the capital portion of a bond in respect of such a property is, however, capital in nature and not an allowable deduction. What is allowed as a deduction, however, is the interest payable on the bond.

So let us briefly recap your rental income scenario: you have gross income in the form of your rental income, no exemptions, and certain allowable deductions. This leaves you with taxable income in the region of R8500 per month. This is obviously the rental income considered in isolation and you may of course have various other sources of income which will be added to your gross income.

The total of your taxable income for any tax-year is finally subject to taxation in terms of the tax-tables for that year.

You mention using the excess R2500 as an additional bond repayment. These payments are applied as capital and no portion of it is applied towards interest (and as a result does not add to your allowable deduction). Over the term of the bond these additional payments will therefore result in significant savings in interest as you reduce the capital at an accelerated rate. Since only interest on the bond is allowed as a deduction for income tax purposes, in the long-term your deductions will effectively decrease faster as a result of the additional payment as the interest component on your bond repayments reduce at a faster rate than if you were only paying the minimum instalment.

Certainly if you’ve done a thorough budget and the surplus can safely be applied to additional bond payments you will benefit significantly in the long run. Make sure though that all financial decisions are made in the context of a holistic financial strategy and plan which looks at current and future needs and goals.

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