I have written articles in the past warning on the risks of entering into "unusual" arrangements to save some of the transfer costs when you buy a property.
A change this year to the Transfer Duty Act demonstrates that the South African Revenue Services (SARS) is not only aware of such schemes but is eager to counter their use.
In this article I will outline the change and reiterate some of my previous warnings.
Generally, when you sell your property, using the services of an estate agent, you, as the seller, are responsible for paying the selling commission to the agent. To do this you generally use a portion of the proceeds of the selling price. The buyer will have paid transfer duty on the full purchase price, which represents the market value of the property.
Recently, it has become a fairly common practice for the buyer to be made responsible for the agent's commission. The selling price is then reduced accordingly and, it is argued, the transfer duty should only be paid on the actual amount paid to you as the seller, that is, excluding the estate agent's commission.
The Transfer Duty Act appeared to sanction this practice by saying that, if the buyer was responsible for payingthe commission, only the excess over five percent commission would be added to the purchase price to determine the market value of the property for transfer duty purposes.
Transfer duty is, however, payable on the market value of the property regardless of the selling price and who pays the agent's commission.
Although, where the buyer pays the commission, he will argue that the market value is the price paid for the property excluding the five percent commission.
He will argue that he asked the agent to find the property and the agent's commission is over and above the market value of the property.
It is clear that the SARS have not been entirely convinced by this argument.
Therefore, for property bought after June 29 1998, the law now says that the value of the property will include any amount paid by the buyer as agent's commission even if this is five percent or less, unless the sale is a sale in execution where the five percent rule will still apply because it is generally accepted that the buyer will pay the commission in a sale of execution.
As a consequence, there is no longer an advantage, from a transfer duty point-of-view, in asking the buyer to pay the commission and reducing the selling price.
Another practice that seems to have developed, and which "appears" to avoid transfer duty, is where you buy a property, particularly new developments, with a view to re-selling it before the development is finished and before transfer has taken place into your name.
Often the first purchase document is made out in the name of a nominee. When the eventual transfer takes place, it is made into the name of the person to whom you have sold the property, usually for a higher price.
Transfer duty is paid on that transfer and you simply take the difference between the price you signed for and the price you sold at.
However, it may be argued that there have been two agreements to sell the property, and consequently, transfer duty should be paid in respect of both agreements.
In addition, this type of transaction is clearly speculative and income tax should be paid on the profit made on this transaction.
It is important, when you enter into property transactions, to understand what the transfer duty implications are and to ensure that you comply with the law.