South Africa


  • Service: Tax
  • Type: Business and industry issue
  • Date: 2011/09/12

Tax and Legal

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Allowances relating to leasehold improvements 

In terms of certain lease agreements, the lessee may be obliged to effect improvements to the leased asset either by erecting a building on the land or improving an existing building. The issue with such arrangements is that as the land belongs to the lessor and because in law, buildings attach to land, the building becomes the property of the lessor when it is built. The lessor, however, is not entitled to the use of the building until the end of the lease period.

In order to clarify the position for tax purposes, the Income Tax Act, No. 58 of 1962 (Income Tax Act), contains specific provisions that relate to leasehold improvements.


The lessor must include the value of the improvements (as stipulated in the agreement) in his gross income in the year that the right accrues to him. There has to be an obligation to effect the improvements. If no amount is stipulated in the lease agreement or the amount is unrealistic, the Commissioner can decide on a fair and reasonable value of the improvements.

The lessor can, however, apply for relief in terms of section 11(h) of the Income Tax Act, which gives the lessor a deduction equal to the difference between the value of the improvements included in his gross income and the amount of those improvements discounted over the period of the lease, excluding any renewal periods. (In practice, the discounted rate applied by the Commissioner is six percent.)


The lessee who carries out the leasehold improvements can deduct the cost of the improvements annually, spread over the period of the lease or 25 years (whichever is shorter), provided that the land or buildings are occupied or used by the lessee for the production of income. This deduction cannot be claimed by the lessee if the lessor does not include the improvements in his income.

If the lease agreement is terminated before the end of the lease period, the lessee can deduct the balance of the cost of improvements not previously deducted.

The lessee should also take note of the following:


  • If there are renewal options in the lease, the Commissioner requires the lessee to spread the deduction over the probable duration of the use/occupation of the property.
  • The lessor will be taxed on the amount stipulated in the lease agreement even when the improvements cost more or less than the amount stipulated in the lease. The lessee on the other hand, will only be able to claim their allowance based on:


      1. the actual cost of the improvements (when they are less than the amount stipulated in the lease); or
      2. the amount stipulated in the lease (when the costs exceed the amount stipulated in the lease).

Taxpayers commonly make improvements to leasehold property without regard to the lease agreements. These improvements are generally capitalised for accounting purposes and then written off for income tax purposes in the form of a wear and tear allowance. These improvements cannot be written off for income tax purposes. Furthermore, certain items are classified as improvements but may be regarded as repairs, and therefore be entitled to a deduction in terms of section 11(d) of the Income Tax Act.

Taxpayers should therefore be careful when classifying additions to their asset base as leasehold improvements.