Cape Town’s Short-Term Rental Rule Rules: Tax & Compliance Guide

From Residential to Commercial: What Is Changing?

Contrary to some sensational headlines about a new “Airbnb tax,” the City has made it clear that no entirely new tax or charge is being introduced. Instead, the draft by-law will tighten enforcement of the current Municipal Rates Policy, which already requires premises primarily used for commercial accommodation to be rated on a commercial tariff rather than the lower residential rate.

Under the existing municipal framework, properties used as commercial accommodation, including full-time short-term lets should already attract commercial rates. The proposed by-law will give the City stronger tools to identify and reclassify properties that are effectively operating as businesses but still paying residential rates.

Importantly:

Primary residences where the owner occasionally lets out a room or part of the home will continue to qualify for residential rates.
Long-term rentals where the tenant lives in the property as their primary residence are not classified as commercial for rating purposes.
Properties used predominantly as full-time commercial short-term lets may be reclassified to commercial, resulting in materially higher municipal rates.

This is a compliance and classification refinement with significant financial implications, rather than an entirely new levy on tourism.

Why This Matters to Property Owners and Investors

According to data aggregated on Airbnb listings, Cape Town has tens of thousands of short-term rentals, many of which operate more like small hotels than occasional home shares. Industry estimates suggest more than 26 000 listings in the metropolitan area, reflecting the city’s strong tourism sector and attractive property market.

The economic and social context is part of the City’s motivation for tighter regulation:

Short-term rentals can reduce the availability of long-term housing and contribute to upward pressure on rents and property prices.
Ensuring that short-term rental operators pay the correct municipal rates is framed as a fairness issue between accommodation businesses.

For property owners, this means revisiting how their properties are classified and ensuring that municipal rates accounts reflect the actual commercial use of the property now and in future.

SARS and Rental Income: A Separate but Critical Compliance Dimension

Beyond municipal rates, property owners must recognise that rental income, whether short-term or long-term is taxable under South African law.

Under the South African tax system:

Income received from renting property is included in the owner’s annual taxable income.
Property owners are entitled to deduct expenses wholly and exclusively incurred in producing rental income, such as municipal rates, repairs and management fees.
If short-term rental turnover exceeds R1 million in a 12-month period, VAT registration may be mandatory, adding another layer of compliance.

The legal position is firm: all rental income must be declared to the South African Revenue Service (SARS), irrespective of whether the property is your primary residence, a holiday home or part of a property investment portfolio.

Failing to declare rental income or misclassifying income for tax purposes can have serious and dreaded consequences:

Assessments and penalties: SARS may issue additional assessments, impose administrative penalties under the Tax Administration Act, and charge interest on unpaid tax.
Criminal exposure: In cases of intentional understatement or concealment of income, taxpayers can face criminal investigation and prosecution.
Reputational and financial risk: For professionals and businesses, non-compliance can harm reputation and access to SARS compliance programmes.

In practice, many property owners underestimate the scope of taxable income on short-term lets. Whether derived from Airbnb, Booking.com or private arrangements.

Practical Steps for Property Owners and Tax Practitioners

In light of these developments, property owners should consider the following actions:

1. Review the usage profile of your property to determine whether it should be rated as residential or commercial under the City’s Rates Policy.

2. Engage with the City of Cape Town early in the public participation process for the Short-Term Letting By-Law to understand the implications specific to your property.

3. Ensure complete and accurate SARS returns that reflect all rental income and claim only legitimate deductions.

4. Assess VAT exposure if your annual short-term rental turnover approaches or exceeds the R1 million threshold.

5. Seek professional tax and legal advice to manage classification, compliance and risk effectively.

Conclusion

Cape Town’s proposed Short-Term Letting By-Law is a compliance-oriented response to ensure that properties used predominantly as commercial accommodation are taxed appropriately at the municipal level. While the focus is on correcting classification rather than introducing new taxation, the implications for property owners and investors are significant.

Equally important is the clear rule that rental income must be declared for tax purposes, whether from occasional stays or a thriving short-term rental business. South African taxpayers who underestimate this obligation risk administrative penalties and other grave consequences.

This is an opportune time for affected taxpayers to review their property use, municipal rate classification and tax compliance strategies, not only to avoid penalties but to strengthen their overall fiscal governance.