The loophole that has allowed buyers of property to sidestep paying transfer duty has been closed and a new law is expected to be in place as early as next month to curb this abuse.
Furthermore, the law will make "sellers" of property held in a company, close corporation (CC) or trust liable for transfer duty if the buyer fails to pay the tax.
Transfer duty is a tax which is payable when you buy property. When you buy property, the property is transferred from the name of the seller into yours, hence the name "Transfer Duty".
Addressing the National Assembly when the Revenue Laws Amendment Bill was tabled recently, Trevor Manuel, the Minister of Finance, said the government had become increasingly concerned about techniques used to avoid transfer duty on the sale of residential and holiday homes.
These avoidance techniques unnecessarily narrowed the tax base, thereby increasing the rate for taxpayers who transferred their properties without such artificial ploys, he said.
Currently, property sellers can save buyers from paying transfer duty by placing their property in a company or a CC. When they sell that property, they sell the shares in the company, or members' interest in the CC, and the new owner does not have to pay transfer duty because the property remains registered in the name of the company or CC.
The buyer of the shares in a property-owning company will merely have to pay the Receiver of Revenue a nominal stamp duty fee on the transfer of the shares.
Similarly, when property is placed in a trust the "owner" is named as the beneficiary of the trust. When the owner wants to sell the property, the trust is "sold", and the new owner is named as the beneficiary, and once again, transfer duty is avoided.
The Revenue Laws Amendment Bill stops this practice by introducing transfer duty, despite the existence of company or tax structures.
"No legitimate economic reason exists for these forms of property to be owned by a company or trust when most homeowners would otherwise have sold these residential properties directly," Manuel has said.
The bill introduces new provisions to the Transfer Duty Act and these provisions are expected to come into practice next month after the bill has been signed into law by the president.
According to the explanatory memorandum on the Revenue Laws Amendment Bill:
- A new definition of the word "acquired" makes it clear that the acquisition of a contingent right in a trust that holds either a residential property or a share in a property-owning company, will be subject to transfer duty.
- The definition of "fair value" - which applies to companies' assets - has been extended to cover the abnormal situation created by schemes in which the value of the assets are manipulated. Normally, the fair value is arrived at by subtracting the loan amount, of say R500 000, from the assets, such as a house, of the same value, and transfer duty is paid on a negligible amount, of say R1. Under the new definition of fair value of residential properties held in companies, any debt will be disregarded when determining the amount on which the duty is to be paid.
- Shares held in a company or a member's interest in a CC are deemed to be "property" and so disposing of such shares or member's interest will attract transfer duty.
- A new definition, "residential property company", will be inserted into the law to single out CCs and companies where the only asset, or the majority of the assets, consists of a house, flat or land zoned for residential use, thereby avoiding transfer duty on the sale of the shares or member's interest. This definition applies when more than one company is owned, such as a holiday home or a speculation house which is held in two different CCs. Business enterprises involving apartments, hotels and motels will not fall into the transfer duty net.
- The amendments to the Transfer Duty Act assume that property is acquired when any or all of the trustees and/or contingent beneficiaries are substituted in a trust. Because naming a contingent beneficiary will trigger transfer duty, the amendments contain an exception so that when new beneficiaries are added to a trust, because of births, adoptions or extensions of the family due to a second marriage, this will not trigger transfer duty.
- Normally the buyer of property is liable to pay transfer duty. But when there is a change of ownership in a company or CC that owns property, in terms of the amendments, the liability is extended to the public officer and the seller, who will be jointly and severally liable for the transfer duty should the buyer fail to pay.
The public officer is the person at a company or CC who normally deals with the Receiver of Revenue on behalf of his or her organisation and to whom the Receiver will look to submit the tax returns of the company.
Similarly, new beneficiaries of a trust will be liable for duty. Should they fail to pay the duty, the trust and the former and current trustees will be jointly and severally liable.
When does it apply?
The draft bill says that the proposed changes will come into operation once the bill is enacted, and that it will apply to the acquisition of shares in a company, or member's interest in a CC, or contingent rights in a trust on or after the date of promulgation.
Shareblock companies
David Warmback, an attorney at Shepstone & Wylie in Durban, says it is unfortunate that the revenue authorities refer to the use of corporate vehicles for owning residential property as "tax avoidance and abuse". The buyers of property have used these vehicles for various good reasons in the past, including the protection of their biggest asset from creditors, and in the case of trusts, for valid estate planning purposes.
A company or CC is also a useful practical vehicle in which to hold a holiday home that may be used by a syndicate of owners who change from time to time. The tax authorities have had the benefit of getting a higher transfer duty rate when these entities first acquire the properties. Trusts, CCs and companies are charged transfer duty at a flat rate of 10 percent when buying property.
Capital Gains Tax
Warmback says that since the introduction of capital gains tax (CGT) last year, the practice of using corporate vehicles to buy one's home has decreased substantially, mainly because you do not get the R1 million CGT exemption unless the home is registered in your own name. In addition, CGT rates on capital gains are also higher for companies and CCs, and higher still for trusts.
CGT at an effective rate of 15 percent applies to companies and CCs, while trusts are liable for an effective 20 percent on any profits made.
Warmback says the new amendments are likely to have an adverse effect on shareblock schemes. In a shareblock scheme, the property is owned by a shareblock company. Shareholders have the right to occupy part of a building through a "use" agreement. Currently no transfer duty is payable on the transfer of shareblocks.
How much is transfer duty?
Transfer duty rates depend on the legal entity buying the property. If you buy a property in your own name, the amount you pay in transfer duty depends on what you pay for the property. Property under R100 000 is free of transfer duty. For property between R100 001 and R300 000, you have to pay five percent on the value above R100 000. For property worth R300 001 and more, you pay R10 000 plus eight percent on the value above R300 000. For example, on a R350 000 property, the transfer duty will be R14 000.
A company, trust or close corporation (CC) that purchases property must pay transfer duty at a flat rate of 10 percent of the value of the property.
Why do some developers advertise that you don't have to pay transfer duty, and will this still be legal?
Either VAT or transfer duty must be paid when you buy a property. Most developers register with the Receiver of Revenue to pay VAT and therefore have to charge VAT on the properties they sell. So, when a developer is registered to pay VAT, you will not have to pay transfer duty, but that does not mean you are not paying any tax. You are, in fact, paying VAT because VAT is included in the price of the property, even if the developer does not point this out to you. It is not illegal for you not to pay transfer duty in such an instance. The obligation to pay the VAT to the Receiver of Revenue lies with the developer. These purchases will not be affected by the new laws.