As the owner or financial manager of a hotel, guesthouse, or B&B, you know how important it is to keep costs low and maximize profits. One area that you may not have considered is tax planning. By taking advantage of the various tax breaks and incentives available to your business, you can save thousands of Rand each year.
In this blog post, we will discuss some of the special tax breaks available to hotels, guesthouses, and B&Bs in South Africa, and provide examples of how they can benefit your business.
In South Africa, the Income Tax Act defines a “hotel keeper” as a person who carries on the business of keeping a hotel, guesthouse, boarding house, or other similar establishment. This includes providing accommodation, meals, and other services to the public in exchange for payment.
According to the Act, a hotel keeper is considered to be carrying on a trade, and their income from this business is subject to income tax. They are required to register as a taxpayer with the South African Revenue Service (SARS) and file tax returns on a regular basis, reporting their income and expenses related to the hotel business.
Hotel keepers are also subject to value-added tax (VAT) on the goods and services they provide, and they may be able to claim input tax credits for VAT paid on their business expenses.
Capital Expenditures Tax Deductions:
Capital expenditures are the funds used to acquire or improve long-term assets such as buildings, equipment, and land. In South Africa, hotels, guesthouses, and B&Bs can claim deductions for capital expenditures on renovations and improvements to the property. For example, if your hotel spends R100,000 on renovating guest rooms, you can claim a deduction of R100,000 on your tax return, which can reduce your taxable income and save you money on taxes.
However, it’s important to note that in order to qualify for these deductions, the capital expenditures must be for the purpose of generating income. Additionally, capital expenditures are typically depreciated over a period of time, rather than being fully deductible in the year in which they are made. The specific rules for depreciating capital expenditures can vary depending on the type of asset, and it is advisable to consult with a tax professional or accountant to ensure that you are fully compliant with all relevant tax laws and regulations.
It’s also worth noting that there are certain limitations to the amount of capital expenditure that can be claimed as tax deductions. SARS has set maximum limits for certain types of assets, such as buildings and certain types of equipment.
In addition, certain capital expenditures may also qualify for accelerated depreciation or other types of tax incentives, such as the Section 12L Energy Efficiency Savings Tax Incentive, which allows companies that make energy-efficient improvements to their buildings and equipment to claim additional deductions.
Capital expenditures tax deductions can be a valuable tool for hotels in South Africa to save money on taxes and improve their properties, but it’s important to understand the rules and regulations and to consult with a tax professional to ensure compliance and maximize the benefits.
Operational Expense Tax Deductions:
Operational expenses are the costs incurred in running your business on a day-to-day basis. In South Africa, guesthouses can claim deductions for certain operational expenses such as energy efficiency upgrades. For example, if a guesthouse installs solar panels with a cost of R50,000, it can claim a deduction of R25,000 on its tax return, which can offset the expense of these upgrades and make them more financially viable for the business.
Other operational expenses that hotels in South Africa can claim deductions for include:
- Maintenance and repairs of buildings and equipment
- Salaries and wages for employees
- Rent or lease payments for the property
- Stationery and office supplies
- Marketing and advertising expenses
- Legal and professional fees
- Travel and entertainment expenses
- Property taxes
It is important to note that in order to claim deductions for operational expenses, the business must be able to provide adequate documentation, such as invoices and receipts, to show that the expense was incurred in the course of running the business.
Please Note: With new tax laws coming in 2021, the accelerated depreciation is being phased out, and businesses should take that into consideration before making any big investments (read here).
Accelerated depreciation is a method of claiming deductions for the cost of certain assets over a shorter period than the assets’ expected useful life. In South Africa, hotels and B&Bs can claim accelerated depreciation on certain qualifying assets, such as furniture and equipment. For example, if a hotel purchases R200,000 worth of new furniture and claims accelerated depreciation, it can claim a R200,000 tax deduction in the first year, instead of spreading the deduction over a period of several years.
Accelerated depreciation can be a useful tool for hotels and B&Bs to reduce their tax liability and improve cash flow. The benefits of accelerated depreciation include:
- Allowing businesses to claim a larger deduction in the current year, which can offset income and reduce the amount of taxes owed.
- Helping businesses to recover the cost of an asset more quickly.
- Encouraging businesses to invest in new equipment and assets, which can lead to increased productivity and efficiency.
To qualify for accelerated depreciation, the assets must be used in the production of income and must be depreciable assets, such as buildings, machinery, equipment, vehicles, and furniture. Additionally, there are specific rules and regulations for accelerated depreciation set by the South African Revenue Service (SARS), so it is recommended that businesses consult with a tax professional to ensure compliance.
Special Economic Zones (SEZ) Tax Incentives:
Special economic zones (SEZs) are designated areas in South Africa that have been created to promote economic growth and job creation (read here). Companies operating in these zones may be eligible for certain tax incentives such as reduced corporate income tax rates, exemptions from certain taxes, and other benefits. For example, if a hotel is located in one of these zones and is eligible for a reduced corporate income tax rate of 20% instead of the standard 28%, it can save R800,000 on taxes for every R10,000,000 in income.
Special economic zones (SEZs) are designed to encourage investment and promote economic development in specific regions of South Africa. The government provides various incentives to companies operating in these zones to promote job creation and economic growth. These incentives can include:
- Reduced corporate income tax rates: Companies operating in SEZs may be eligible for a reduced corporate income tax rate, which can save them significant amounts of money on taxes.
- Tax exemptions: Some companies operating in SEZs may be eligible for exemptions from certain taxes, such as value-added tax (VAT) or import duties.
- Customs and Excise Duty reductions: Companies operating in SEZs may be eligible for reduced tariffs and other customs and excise duty reductions.
- Infrastructure support: Companies operating in SEZs may have access to improved infrastructure and other support services, such as access to electricity and water.
It’s worth mentioning that these incentives are subject to change, and depend on the specific SEZ and the company’s activities.
SEZs are also designed to encourage investment in specific sectors, such as manufacturing, information technology, and tourism. Hotels and B&Bs, as part of the tourism sector, could benefit from the benefits that SEZs provide to the sector, such as reduced red tape and easier access to investment opportunities.
Common Questions Our Clients Ask
Q: What documentation do I need to provide to claim capital expenditures tax deductions?
A: To claim capital expenditures tax deductions, you will need to provide documentation such as invoices, receipts, and contracts showing the costs of the renovations or improvements. You may also need to provide additional documentation, such as plans and permits, to show that the renovations or improvements were made to the property.
Q: Are there any limitations on the amount of operational expenses that can be claimed as deductions?
A: Yes, there may be limitations on the amount of operational expenses that can be claimed as deductions. It is best to check with a tax professional to understand the limitations that may apply to your specific circumstances.
Q: What assets qualify for accelerated depreciation?
A: Assets that qualify for accelerated depreciation typically include furniture, equipment, and certain types of machinery. It is best to check with a tax professional to understand which assets qualify and what the specific rules are for claiming accelerated depreciation.
Q: How do I know if my hotel is located in a special economic zone?
A: To determine if your hotel is located in a special economic zone, you can check with the relevant government agency or consult with a tax professional who can help you to identify eligible zones and the tax incentives available.
Q: Can I claim these tax breaks if my hotel is owned by a public company?
A: Yes, public companies that operate hotels, guesthouses, and B&Bs may be eligible for certain tax incentives and deductions, including capital expenditures tax deductions, operational expense tax deductions, accelerated depreciation, and special economic zones (SEZ) tax incentives.
Q: Does this tax breaks apply to my Airbnb rental?
A: In South Africa, Airbnb rentals may be subject to the same tax rules and regulations as hotels, guesthouses, and B&Bs. The income generated from renting out a room or property on Airbnb is considered to be income from a trade or business, and is therefore subject to income tax. However, it’s important to note that different tax laws and regulations may apply depending on the specific circumstances of your Airbnb rental. For example, renting out a room in your primary residence may be treated differently than renting out a separate property. Additionally, if the property is used for both residential and commercial purposes, it could be subject to different tax laws.
Q: Is it necessary to consult with a tax professional?
A: It is highly recommended to consult with a tax professional to understand the specific tax laws and regulations that apply to your business and to ensure that you are taking advantage of all available tax breaks and incentives. A tax professional can also help you to navigate the documentation and filing requirements and ensure that your deductions and credits are accurate and compliant.
As an owner or financial manager of a hotel, guesthouse, or B&B, it’s important to explore all the tax breaks and incentives available to your business. By doing so, you can save thousands of Rand each year and improve the bottom line of your business. We recommend consulting with our tax professional who can review your specific circumstances and help you to take advantage of all available tax incentives and you’ll be able to maximize your tax savings and keep more money in your pocket.
P.S. It’s important to note that the Income Tax Act may be subject to changes and amendments over time, so it’s always best to check with a tax professional or SARS for the most up-to-date information and guidance.