From today, it will be cheaper for you to buy property because adjustments to transfer duty rates were announced in the latest Budget.
Finance Minister Trevor Manuel also announced other changes to the way property transactions are taxed when he delivered his Budget.
Transfer duty is a tax that you have to pay when you buy any property, whether it be a flat, a townhouse, a free-standing house, or a plot of land. The tax is calculated as a percentage of the value of the property you buy.
Manuel has changed the thresholds at which rates of transfer duty are calculated. People who buy lower-priced properties will enjoy greater relief than those who opt for more expensive homes.
The amendments will apply to property acquired from March 1 this year, and are expected to cost the government R435 million.
The effect of the changes is that the average duty on a property with a value of R200 000 will fall from 2.5 percent to 1.5 percent, while the duty on a property with a value of R400 000 will fall from 4.5 percent to 3.9 percent.
Manuel has raised the threshold at which transfer duty starts to apply from R100 000 to R140 000. In other words, you will not have to pay any transfer duty if you buy a property worth R140 000 or less.
In terms of the adjusted transfer duty rates, should you buy a property with a value of between R140 001 and R320 000, you will be charged five percent on the value above R140 000.
Previously, if you bought a property with a value of between R100 001 and R300 000, you were charged five percent on the value of the property between R100 000 and R300 000.
From today, should you buy a property with a value of R320 001 or more, you will be charged R9 000 plus eight percent of the value of the property above R320 000.
Previously, if you bought a property with a value of R300 001 and above, you were charged R10 000 plus eight percent on the value above R300 000.
So, for example, if you buy a house costing R450 000, you will now pay transfer duty of R19 400 (R9 000 + R10 400). . Previously, you would have paid R2 600 more in transfer duty - or a total of R22 000 (R10 000 + R12 000). .
Remember, the above rates apply to individuals only. If a property is bought by a company or a close corporation (CC), a flat rate of 10 percent of the value of the property is levied.
Also, should you buy a property directly from a developer who pays VAT on his or her business, the developer is obliged to include VAT in the price of the property that is sold to you. Such sales are often advertised as being "free of transfer duty" - which, strictly speaking, is true. However, you are still paying tax on the property transaction - in the form of VAT rather than transfer duty.
The VAT rate is currently 14 percent and there were no proposals in the Budget to change it.
David Warmback, an attorney at law firm Shepstone & Wylie, says the raised exemption level and amended rate categories will result in across- the-board reductions in transfer duty. This is to be welcomed, particularly in view of the substantial increase in the value of residential property over the past year or so.
Warmback says the adjustments are also to be welcomed in light of the change to the transfer duty legislation on December 13 last year which made duty payable on the transfer of interests in residential property-owning companies, CCs and trusts.
Before the law was changed, buyers were able to purchase shares or interests in a property-owning company, CC or trust - rather than the property itself - without paying transfer duty.
Warmback says the government has also proposed introducing penalties for failing to pay transfer duty. Currently, there are no penalties for violating transfer duty. In order to promote consistency with other tax regimes, it is proposed that penalties of up to 200 percent be charged.
Nominee purchases
In the Budget, Manuel announced plans to close a tax loophole used by property dealers - usually speculators - whereby nominee purchases are used to avoid transfer duty on the resale of a property.
In these transactions, a dealer buys a property on behalf of "an unnamed nominee". The dealer inserts the name when a suitable buyer is found and in this way hides a taxable transaction. Normally, when a dealer buys a property, he or she should pay transfer duty and when the developer in turn sells it to the next buyer, that buyer should also pay transfer duty.
Warmback says it is common for developers, particularly when they make an offer to purchase a property, to use the right to nominate a nominee to take transfer of the property. The nominee is a different entity or person to the entity or person signing the agreement. Often the nominee is an entity "linked" to the original purchaser, such as a company or CC, in which the signatory of the agreement has an interest.
But, he says, buyers are also using the nominee mechanism to introduce a totally different person or entity as the eventual purchaser of the property - in effect "finding" a new purchaser. Rather than doing a "double" transfer, the first purchaser falls away and the nominee takes transfer.
The Budget Review noted that the South African Revenue Service (SARS) is aware that certain property dealers are using nominee purchases to avoid paying transfer duty or VAT upon resale, and that these "artificial transactions" will be disallowed.
Warmback says while SARS's concern with nominee purchases where the property is in effect "resold" to a totally different entity is understandable, it is hoped that genuine nominee purchases will be accommodated. The latter often arise when the original purchaser is unsure at the time of having to make an offer which entity or person - such as a husband or his wife - is more suitable from a business or personal point of view to take transfer of the property.
Changing to sectional title ownership
It was also announced in the Budget that the government plans to amend the Income Tax Act later this year to allow homeowners to convert their shareblock interest to sectional title without the change triggering capital gains tax.
When you buy property in a shareblock, you buy shares in a company which gives you the right to a certain section of a property owned by that company. With sectional title ownership, you are the actual owner of your flat. Sectional title ownership is considered a safer way to own property than shareblock.
VAT on bank repossessions
A change may be made this year to the VAT Act which could be to the advantage of people whose properties are repossessed by a bank and subsequently sold on auction.
Currently, banks which buy such properties at auctions are not allowed to claim the VAT as a tax deduction, and so they pass the cost of VAT on to the defaulter.
If the VAT Act is changed, banks will be allowed to claim such VAT as a tax deduction and will therefore be able to charge the new buyer VAT, thereby eliminating the need to recover the cost from the defaulter.