The South African Revenue Service (SARS) has recently released a draft interpretation note on the tax implications of rental income from tank containers. The tank containers in question are the large metal containers used for the bulk transportation of cargo. A tank container can be acquired as an investment and let out to clients for rental income.

SARS has identified investments in tank containers, by companies and individuals, as being common in South Africa. The typical arrangement referred to in the draft interpretation note, involves the acquisition of a tank container and the appointment of a South African investment management company as the investor’s agent for a 10 year period. The investment manager then enters into arrangements with offshore lease managers, which handle the day to day leasing of the tank containers to end customers.

The tank containers may be placed in a rental pool with other tank containers, so that each investor receives its share of the net rental income from that pool. The investors generally purchase or lease the tank containers in Rand and then lease them for US dollar rentals.

In the draft interpretation note, SARS sets out its views on the general tax implications of renting out tank containers. It is, however, recognized that each specific arrangement must be considered according to its own facts.

The starting point in the draft interpretation note is South Africa’s residence basis of taxation. This means that South African residents are taxed in South Africa on their worldwide income. This will include the letting of tank containers to international clients. Rental income that is earned in in US dollars (or any other foreign currency), will generally be converted to Rand at the spot rate on the date of its receipt or accrual.

Investors in tank containers will generally be entitled to deductions for expenditure incurred in respect of their rental operations. The deductions mentioned by SARS in this context include interest, agents or management fees, repairs and maintenance, re-certification fees and insurance. The wear and tear allowance recognized by SARS for tank containers is calculated on a straight line basis over 10 years. The wear and tear allowance will be limited to the taxable income from the letting of the tank containers (before deducting such allowance).

SARS takes the view that the letting of tank containers will generally constitute a trade carried on outside South Africa. On that basis, SARS will seek to disallow the set-off of any assessed loss from such trade, against income from carrying on a trade in South Africa.

Author : Tim Desmond, Director in the Commercial Department of Garlicke & Bousfield Inc

For more information contact Tim Desmond on telephone +27 31 570 5401 or +27 83 637 1852