This is the first article in a series discussing urban zone development allowances. This article lists the first of two requirements, the building requirement and urban development zone requirement, to be met for the allowances to apply. A second article will list further requirements.
Source: SARS Guide to the Urban Development Zone Allowance dated 25 June 2025
The guide, amongst others, provides:
• General guidance regarding the application and interpretation of the provisions of the Act that pertain to the allowance;
• An overview of the income tax consequences associated with the disposal of a building on which the allowance was previously allowed or the cessation of a taxpayer to use such a building solely for that person’s trade; and
• Particulars of municipalities that have demarcated areas for purposes of the allowance, as well as the process of demarcation that was followed.
Similar to many other countries, South Africa has numerous urban areas that are impoverished and suffering from extensive urban decay. In order to address these problems and maintain existing infrastructure, governments internationally have increasingly used tax measures to support efforts aimed at regenerating these urban areas.
In 2003, the Minister announced a tax incentive in the form of an accelerated depreciation allowance under section 13quat, which sought to promote investment in designated inner cities. The core objectives of the allowance are to address dereliction and dilapidation in South Africa’s largest cities and to encourage urban renewal and development within these cities.
This is achieved by promoting investment by the private sector in the construction or improvement of commercial and residential buildings, including low-cost housing units situated within demarcated UDZs. The allowance is also intended to encourage investment in highly populated areas, central business districts or inner-city environments and areas with existing urban transport infrastructure for trains, buses or taxis. Currently, 15 cities in South Africa have one or more demarcated UDZs within their boundaries, making up a total of 16 UDZs.
The allowance, when deducted, reduces the taxable income of a taxpayer and is not limited to the taxable income of a taxpayer. It can therefore create an assessed loss. The allowance is available for buildings brought into use on or before 31 March 2030.
Requirements that must be complied with to deduct the allowance [section 13quat(2)]: Any person will be eligible to deduct the allowance only if all the requirements listed below relating to a building are complied with.
BUILDING REQUIREMENT
The allowance under section 13quat applies to buildings meeting certain requirements. The word “building” is not defined in the Act, but has been considered judicially. For instance, in CIR v Le Sueur, the court held that a “building” is “a substantial structure, more or less of a permanent nature, consisting of walls, a roof and the necessary appurtenances thereto”.
Section 13quat applies to a commercial and residential building as well as low-cost residential units.
When deducting the allowance, only the cost of the erection, extension, addition to or improvement of the building qualifies for the allowance, while the cost of the land is specifically excluded.
- Extent of the erection, extension, addition or improvement that has to be undertaken
Section 13quat applies not only to the erection of a building, but also to the extension, addition to or improvement of the building if certain requirements are met. Under section 13quat(2)(c), the erection, extension, addition to or improvement of the building by the taxpayer or developer must cover either the entire building or a floor area of at least 1,000 m2 of that building. This requirement ensures that a substantial part of a building is enhanced, thus aligning with the purpose of the section.
The 1,000 m2 requirement applies only when a part of a building is extended, added to or improved. For example, the replacement of the roof of a part of a building must represent a floor area of at least 1,000 m2 before the taxpayer can deduct an allowance on the cost of effecting the improvements. The 1,000 m2 requirement does not have to be complied with if an entire building is erected, added to, or improved.
Section 13quat(2)(d) states that when a taxpayer purchases a building from a developer on or after 8 November 2005, such developer must:
• Not have previously deducted any allowances under section 13quat on that building; and
• In the case of the improvement of a building in which the existing structural or exterior framework is preserved, the purchaser has incurred expenditure on these improvements, which is equal to at least 20% of the purchase price paid by the purchaser for the building.
A developer who extended, added to, or improved part of a building must comply with the 1,000 m2 requirement before selling that building or a part of it for the purchaser to qualify for an allowance.
In such a case, the purchaser who acquires only a unit in an improved building will not be precluded from deducting the allowance since the developer had already complied with the requirement in section 13quat(2)(c). The purchaser will therefore be allowed to deduct an allowance on the cost of the expenditure incurred by the developer, which is equal to at least 20% of the purchase price, provided that all the other requirements of the section are met.
Example 1 – The 1,000 m2 requirement
Facts:
Developer A decided to extend a two-storey building by adding three additional floors, thus converting it into a five-storey building. Before the extension, the two-storey building had a floor space of less than 1,000 m2 in its entirety. The 1,000 m2 requirement did not, however, apply to the two-storey building since this requirement applies only when part of a building is erected, added to or improved.
The extension of the building consisted of 5 apartments on each floor, with each apartment having a floor area of 80 m2. These apartments were sold off to purchasers upon completion.
Result:
The addition of the three floors can be classified as an addition to a part of a building. The floor area of this addition amounted to 1,200 m2 (80 m2 x 5 = 400 m2; 400 m2 x 3 = 1200 m2). A developer extending, adding to or improving part of a building must comply with the 1,000 m2 requirement before selling that building or a part of it in order for the purchaser to qualify for an allowance.
Since Developer A complied with the 1,000 m2 requirement in relation to the addition and did not claim any allowances under section 13quat, the purchasers were eligible to claim an allowance on the apartments bought by them, provided that they complied with all the other requirements of section 13quat.
- “Extensions”, “additions” and “improvements”
Section 13quat distinguishes between an extension, an addition and an improvement. Since the words “addition” and “extension” are similar in their characteristics, dictionary definitions are useful for distinguishing these terms.
The word “addition” is defined in the Collins Dictionary as “a part added to a building or piece of land”.
In the context of section 13quat, an addition would accordingly include any development that would result in something being appended to an existing building, which would effectively change the existing structure of such a building. For example, adding additional floors or constructing a new block which attaches to an existing building might be considered to be an addition for purposes of this section.
The Collins Dictionary defines “extension” as “An extension is a new room or building which is added to an existing building or group of buildings. A room or rooms added to an existing building”.
From the above, it can be concluded that an addition refers to those developments which are of a more substantial scale, while an extension covers those erections that can be classified as structurally minor when compared to an addition. In both instances, however, the exterior framework of the building is altered in comparison to the initial framework.
The Collins Dictionary defines “improvement” as “the act of improving or the state of being improved, something that improves, especially an addition or alteration, alteration of the structure, fixtures, fittings, or decor of a building without changing its function”.
An improvement accordingly enhances something that is already in existence. Such enhancement can take the form of adding something to an existing part of a building or replacing an existing part. Improvements to a building will, for purposes of section 13quat, include any extension or addition to the building which is incidental to that improvement, and which preserves the existing structural or exterior framework of the building. The alteration of the structure of the building is regarded as an addition or extension. An improvement must, however, be distinguished from a repair. The facts of each case will determine whether an improvement has been effected.
Although it might not always be clear whether one deals with an extension, addition, or improvement, the requirement under section 13quat(2)(c) relating to at least 1,000 m2 must be met.
URBAN DEVELOPMENT ZONE REQUIREMENT
The building that was constructed, extended, added to or improved, or purchased from a developer, must be located within a UDZ.
Several criteria were taken into account in the demarcation of UDZ areas to ensure that the impact of the allowance was maximised in the parts of the cities that were most in need of development.
Each municipality with approved demarcated zones had to prove to the Minister that:
• The demarcated area was located within the boundaries of one of the designated municipalities;
• The area had been demarcated through formal resolution by the municipality;
• The demarcated area was prioritised in the municipality’s integrated development plan as a priority area for further investments to promote business or industrial activity or residential settlements to support such activity;
• The contribution from that area was undergoing a sustained real or nominal decline, while it previously contributed a significant portion of the aggregate revenue collections of the municipality as measured in the form of property rates or assessed property values; and
• Significant fiscal measures had been implemented by the municipality to support the regeneration of that area, including the appropriation of significant funds for developing the area in the annual budget of the municipality, special tariffs for categories of residential, commercial or industrial users or partnership agreements with the business community for the promotion of urban development within that area.
As mentioned above, for an additional demarcated UDZ to be approved, the municipality must have a population of 1 million persons or more, and each area must comply with all the requirements for demarcation.18 Certain restrictions apply relating to the size of the land regarded as UDZs under section 13quat(7)(a).
If a second demarcated zone is approved within a municipality, the two areas must not in total exceed 150 hectares for the first 500,000 persons plus 20 hectares for each additional 100,000 persons included in that population.
Example 2 – limitations relating to the size of demarcated UDZ land
Facts:
In 2015, Municipality B was designated by the Minister as an inner city which was in dire need of regeneration, which resulted in the Municipality embarking on a project of reviving the city and making use of the benefits available under section 13quat. Before the rejuvenation, the municipality had a population of 500 000 and 150 hectares of land were demarcated as a UDZ.
Owing to the improvements made to the inner city, more people made their way to the city, and there was a population boom. In 2024, Municipality B had a population of 1,1 million people, and a need arose for more regenerated inner-city space.
Municipality B consequently applied for an additional demarcation of UDZs in 2025, which was approved by the Minister.
Result:
Under section 13quat(7)(a)(ii), if a municipality has a population of more than 500,000 persons, 150 hectares plus 20 hectares for each additional 100,000 persons included in that population may be demarcated as a UDZ.
A limitation does, however, exist under section 13quat(7)(b). This section states that if a municipality has a population of 1 million people or more, two areas may be demarcated as a UDZ in lieu of only one area as provided for under section 13quat(6). This will apply as long as the two areas do not in total exceed the one area mentioned in section 13quat(7)(a)(ii), and each area must satisfy the requirements in section 13quat(6).
The maximum size of the UDZ area for Municipality B will therefore be calculated as follows:
First 500,000 of the population 150 hectares
An additional 600,000 people (20 hectares x 6) 120 hectares
Total hectares (150 + 120) 270 hectares
This means that Municipality B may have a total of only 270 hectares of land demarcated as UDZs within its boundaries.
A second article will list further requirements.