Property transactions and tax

Victoria Hodgon

It is difficult to think of any transaction involving immovable property that is not affected by the taxes and duties which are imposed by the legislation in South Africa. Either transfer duty or VAT affect most property transactions and their requirements are summarised below together with a brief discussion of a recent tax break in regard to property which has been introduced by the Income Tax Act.

Transfer duty

Transfer duty is imposed in terms of the Transfer Duty Act and, generally speaking, is payable when immovable property is acquired.

Transfer duty is payable by the purchaser to SARS and is calculated as a percentage of the purchase price. If SARS is of the opinion that the purchase price is less than the fair value of the property, then SARS will calculate the transfer duty based on the fair value.

Using the current transfer duty rates, transfer duty payable on a purchase price of R2 million is calculated as follows:

· If the purchaser is a company, close corporation or trust, transfer duty is 8% of the purchase price = R160,000.00

· If the purchaser is an individual, transfer duty is:

· 0% on the first R500,000.00 of the purchase price (R Nil);

· 5% on the amount from R500,000.00 to R1 million (R25,000.00); and

· 8% on the amount over R1 million (R80,000.00)

Total transfer duty = R105,000.00

Transfer duty is payable within six months from the date of acquisition, which is usually the date the sale agreement is signed, failing which SARS will charge penalty interest.

A purchaser does not pay transfer duty in transactions where VAT is payable. In such instances, the purchaser will pay the purchase price and VAT to the seller who is then responsible for paying the VAT to SARS.

Value Added Tax (VAT)

In terms of the VAT Act, VAT is payable on the supply by a VAT vendor of goods supplied in the course and furtherance of any enterprise carried on by such vendor. In relation to a property transaction, this means that if the seller is a VAT vendor and the sale of the property is in the course and furtherance of the seller’s enterprise then VAT will be payable on the purchase price.

Ordinarily such VAT will be calculated at the rate of 14%. However, if the property is sold as a going concern, VAT will be calculated at the rate of 0%.

In order for the sale of a property to be “zero-rated” the following main requirements must be met:

· The seller and purchaser must be VAT vendors.

· The seller and purchaser must agree in writing that the property is sold as a going concern and that the purchase price is inclusive of VAT at the rate of 0%.

· The property must constitute an income earning activity.

· The sale of the property must include all the assets required for carrying on the income earning activity.

Income Tax Act – transfer of residence tax break

A grace period has been introduced in terms of the Income Tax Act which allows for a primary residence owned by a company, close corporation or trust, to be transferred to the relevant individuals of such entity without incurring CGT or transfer duty. The provision applies in respect of transfers made on or after 11 February 2009 and before 1 January 2012.

In order to take advantage of this grace period certain requirements must be met. Briefly, these are as follows:

· the individual must acquire the interest in the residence from the entity and the transfer must be registered in the Deeds Office both by no later than 31 December 2011;

· if the residence is owned by a company or close corporation the individual alone or together with their spouse must have directly held all the share capital in the company / members’ interest in the close corporation from 11 February 2009 to the date of registration of the transfer in the Deeds Office;

· if the residence is owned by a trust the individual must have disposed of the residence to the trust by way of donation, settlement or other disposition OR the individual must have financed all the expenditure actually incurred by the trust to acquire and improve the residence;

· the individual alone or together with their spouse must have personally and ordinarily resided in that residence and used it mainly for domestic purposes as their ordinary residence from 11 February 2009 to the date of registration of transfer in the Deeds Office; and

· the residence must be transferred to the individual or the spouse or to the individual and the spouse jointly.