Category Investments

Transfer Duty Time to go!

09 March 2006 Paul Ferreira

In his February 2006 budget speech the Minister of Finance announced a substantial cut in the transfer duty payable on the acquisition, on or after 1 March 2006, of immovable or fixed property.

The transfer duty exemption is increased from R190 000 to R500 000 and, for example, the duty payable on a residential property costing R1m reduces from R60 600 to R25 000 a reduction of about 59%.

The rate for acquisitions of fixed property by companies and trusts is reduced from a flat 10% to 8%. The higher rate for trusts is there to discourage the use of trusts, which the tax authorities seem to regard as hotbeds for tax avoidance schemes. The reason for the higher rate for companies is buried in history.

The contribution of transfer duty to the national revenue is relatively small: in the 2005/6 fiscal year it was about R9bn (2.54% of all tax revenues) and for the 2005/6 fiscal year it is estimated to be about R11bn (2.67%). This increase in the transfer duty take is probably attributable to more residential properties being built and marked increases in residential property prices, the latter being one reason for the transfer duty reduction.

Transfer duty is mainly confined to the transfer of residential or private property, as the transfer of commercial and industrial property is generally subject to VAT, and where VAT is imposed (even at the zero-rate) transfer duty is not payable.

The reduction is, of course, welcome, but the question may be asked why the government didn't go the whole hog, and abolish transfer duty altogether. It is a transaction tax (like stamp duty on the transfer of shares) and is imposed purely as a source of revenue (not too much at that), without it having any policy, social or economic basis. Perhaps it is a hangover from the bad old days when the thinking appears to have been that it was mostly the wealthy that owned fixed property and transfer duty was a form of wealth tax, which they could afford to pay.

But home ownership is, and has been for some time, government policy, if not a priority, so it makes little sense to have a tax that inhibits home ownership. All right, a house or flat costing less than R500 001 is not subject to transfer duty, but what sort of family home in an urban area do you get for this price, more so in say two years' time? If the house costs R600 000, then the transfer duty will be R5 000. And let's not forget the ongoing municipal rates and taxes that are not insignificant.

Ironically, if the house were acquired from a developer - a likely supplier of houses to first-time homeowners and, to use the Minister's phrase, to the secondary housing market, the purchaser would pay VAT at 14%.

Another irony is that recently there has been some sabre rattling by government about restricting the non-resident ownership of South African fixed property, but at the same time it reduces, by lowering transfer duty rates, the cost of acquiring fixed property.

Transfer duty is a very old tax in South Africa and goes back as far as 1860, if not earlier. The present Transfer Duty Act was enacted in 1949. But these days it doesn't really fit in with the modern, sophisticated and first world tax regime we now have in South Africa.

It has become an anachronism, and it's time for it to be euthanised.

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