Guide to Property Vehicles and Tax

GUIDE TO PROPERTY VEHICLES AND TAX

Guide to Capital Gains Tax

Guide to Mortage Bonds

Guide to Property Vehicles and Tax

Guide to buying Property as a Non-Resident

Guide to Conveyancing

 
1. Introduction
 
2. Tax considerations
 

Donations Tax

 

Estate Duty

 
Income Tax
 
Capital Gains Tax
 
Transfer Duty
 
Value Added Tax
 
STC
 
3. Which vehicle (entity) to use?
 

Company

 

Close Corporation

 
Trust
 
Personal Capacity
 
4. Further advice
 

INTRODUCTION

Strategically it is wrong to select any form of enterprise merely for its tax benefits. Notwithstanding this fact, it is virtually impossible to draw any deed of sale in respect of immovable property, without taking into account the fiscal consequences of such agreement.

 

When a potential investor is faced with selecting an entity as a medium to purchase property, personal preference very often plays a major role. There are, however, a myriad of legal and tax factors that have to be taken into consideration if a sound decision is to be made.

 

The most important entities used in South Africa are a Company, a Close Corporation, a Trust and in your Personal Capacity.
We would like to look at Companies and Close Corporations, Trusts and Individuals as different vehicles for property transactions and in particular at the different advantages and disadvantages of each.

 
TAX CONSIDERATIONS
 
The most important taxes to be considered by purchasers when selecting a vehicle to purchase property, are:
 
a.

DONATIONS TAX

 

The value of any immovable property disposed gratuitously by a company, close corporation, trust or private individual, is in general subject to donations tax at the rate of 20% on the value of  such property. However, the amount of donations exceeding R30 million is taxed at a rate of 25% Exemptions include the first R100 000.00 per annum donated by individuals and all donations between spouses.

   
b.

ESTATE DUTY

 

Estate Duty is levied on all estates above R3,5 million at a rate of 20% and at the rate of 25% above R30 million. The most important exemptions are bequests to a surviving spouse.

 

c.

DIVIDENDS TAX

 

Dividends Tax is levied at a rate of 20% on dividends declared by a Company or Closed Corporation.

 

d.

VALUE ADDED TAX (VAT)

 

VAT is levied as a rate of 15%. If a Seller is registered VAT vendor (normally developers are), the Seller must pay VAT at 15% to SARS and no transfer duty will be payable.

 A deed of sale must clearly indicate whether the Seller is registered for VAT, and if so, whether the purchase price includes or excludes VAT.

 

e.

 

TRANSFER DUTY

 

Transfer duty is levied as follows: in the event of acquisition of property by all persons, which information is also available on our website:

 
R0 – 900 000 0%
R900 001– R1 250 000 3% of the value above R900 000
R1 250 001 – R1750 000  R10 500 plus 6% of the value aboveof R1 250 000
R1 750 001 – R2250 000   R40 500 plus 8% of the value above R1 750 000
R2 250 001 – R10 000 000  R80 500 plus 11% of the value above R2 250 000
R10 000 001 and above  R933 000 plus 13%of the value above R 10 000 000
 
f.

CAPITAL GAINS TAX

 

Capital Gains Tax is imposed on the value of a capital gain on any immovable property disposed of and situated in South Africa, at the following maximum effective rates:

 
Individuals 18%
Close Corporations & Companies    22,4%
 Trusts     36%
   
Exemptions include the first R 2 million of any gain on the primary residence of a private individual. The rate applicable to trusts can furthermore be reduced to a maximum of 18% by distributing gains to beneficiaries who are natural persons.
   
g. INCOME TAX
 

In general, income tax is only payable on the disposal of immovable property if the owner purchased and sold the property in a scheme of profit making.

 Income tax is imposed at the following rates:

 
Individuals progressive rate, maximum 45%
Close Corporations & Companies    28%
 Trusts     45% (but can be reduced by distributing  profits to beneficiaries)
 
PRO’S AND CON’S OF DIFFERENT ENTITIES
 
The following legal and tax factors must be taken into consideration when selecting an entity as a vehicle to purchase property.
 
a.

COMPANIES

 

Like a Close Corporation, a Company is a separate legal entity and except where a shareholder has signed as surety for the Company, there is no liability on shareholders for the debts of the Company.

 

A Company need not be in existence at the time of signing a deed of sale to purchase a property. The deed of sale can be signed “as trustee of a company to be    formed” and only after signature, the company can be formed and the contract ratified. 

     
CON’S    
 
20% tax on dividend
 
Complicated structure
 
CGT higher than individuals, but lower than Trusts
     
PRO’S    
 
More shareholders than with a CC
 
Shareholders not liable for debt of company
 
Income Tax rate is lower than maximum rate of individuals
     
b.   CLOSE CORPORATIONS
 
A Close Corporation is also a separate entity and shareholders (members) are not liable for the debt of the Close Corporation.
 
 For investment purposes, the Close Corporation is far less complicated than a Company and no yearly audit is required, saving costs.
     
c.

 

TRUSTS
 
Contrary to shares in Companies and Close Corporations, the assets of a trust do not  form part of an individual’s estate on date of his death, and no estate duty is payable.
 

Beneficiaries of a trust can not be held liable for the debt of the trust nor can creditors  of beneficiaries attach the assets of the trust for the debt of the beneficiary. This is a  distinct advantage if compared to Close Corporations and Companies where creditors of shareholders can attach and sell the shares of such shareholders.

 
No audit needed for a trust.
 
A trust must exist on the date of the signature of the deed of sale.
 
No donations tax is payable if a trust distributes capital to beneficiaries.
 

A trust is taxed as a flat rate of 45% on income and 36% on capital gains. Where  either income or capital of the trust is distributed to beneficiaries and vest in them,  such beneficiary will be taxed and not the trust. A lower rate of tax will therefore be possible. Where the income is retained in the trust, the trust is taxed and the balance after tax is capitalized.

     
CON’S    
 
Need to be in existence at time of signing an offer to purchase
     
PRO’S    
 
Lower income tax and capital gains tax possible by distribution to beneficiaries
 
Saving on Estate Duty and Donations tax
 
Effective as protection against creditors
 
No audit needed
     
d.   PERSONAL CAPACITY
No audit required
No complicated meetings and resolutions needed
Creditors can attach assets
Donations tax at 20% on donations between R100 000 and R30 000 000 and at 25%  above R30 000 000.
Estate Duty at 20% on assets in excess of R3 500 000 up to R30 000 000 and at  25% on assets in excess of R30 000 000
First R2 000 000.00 capital gain when selling a property if such property is the prime residence of the Seller, is exempt from Capital Gains Tax and the rest is taxed at maximum 18% 
Income tax is imposed at a progressive rate, maximum 45%
   
CON’S    
All assets subject to attachment
  Estate duty and donations tax
PRO’S    
 
R2 000 000.00 exemption on Primary Residence sale
 
Lowest capital gains tax rate
 

FURTHER ADVICE

The information contained in this outline provides only a brief summary of the law and tax applicable to the acquisition of immovable property. It is highly recommended that the purchaser consult one of our expert property and tax attorneys prior to signing an offer to purchase to enable him/her to make the best possible decision, having due regard to their individual circumstances.

       

 

e-mail address:

admin@cwmalan.co.za

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+27 42 2951056

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