The 2010 World Cup is just a few short months away. And I’ve been taking vuvuzela lessons from my neighbour, so I can celebrate every goal we score!

The soccer excitement is mounting, and small businesses across SA are anticipating a boost in business. New business opportunities are budding too. “I’m renting out my flat, and I’ve been guaranteed enough cash in rental income, to knock at least two years off my bond repayments — isn’t that amazing?” my friend, Nicole, exclaimed over coffee last weekend.

“Yep – until the taxman takes a huge cut of your rental income,” I replied. Nicole isn’t the only one who’s signed on to rent out her home to visiting fans, without having considered the tax implications. So I’m sure the taxman’s rubbing his hands in glee…

You’re facing a potentially scary tax bill

 “You see, that kind of large income is going to set alarm bells ringing for the taxman, even though it’s only earned in one month, and not every month. And you could be left to face a really ugly tax situation,” I said.

After all, the windfall of cash will push Nicole into a higher tax bracket (and one she may not be able to afford, on her teacher’s salary).

“But I’ve already signed an agreement with the agency that’s setting up the rentals. And I’ve already started renovations on my flat, to get it ready… What should I do?” asked Nicole.

The good news for you and Nicole

The good news, I told her, is that she can declare the renovations she has made to get a tax deduction. “So start keeping all your receipts, and find the paperwork from the letting agent, stating that you needed to do the renovations to meet their requirements,” I said.

Unfortunately, there’s no way out of the income tax

Other than that, Nicole is going to have to declare the rental income, and she’s going to have to deal with the tax that’s incurred as a result. In the meanwhile, she’ll have to find out how much she’s likely to be taxed on the rental income, so she can be prepared.  I mean, who needs tax penalties on top of a hefty tax bill, right?

Good admin is your best friend

I also told her to keep all her municipal bills, electrical bills, etc over the rental period, because she can claim these expenses on a pro-rata basis. Her lessors should also sign an agreement, stating what costs they will cover, in their rental payment, so that everything is clear.
Plus, with the tax auditors on the lookout for these sorts of bonus incomes, she’s going to need to keep copies of everything, just in case…

Good thing I gave Nicole a copy of the Practical Tax Handbook for Christmas, so she can read up on rental income, and taxes and be prepared!

Until next time,

Fulvia Becatti
Managing Editor: Practical Tax Handbook and Practical Vat Handbook