GUIDE TO PROPERTY VEHICLES AND TAX
Strategically it is wrong to select any
form of enterprise merely for its tax benefits.
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
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.
The most important taxes to be
considered by purchasers when selecting a vehicle to purchase
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.
Exemptions include the first R100 000.00
per annum donated by individuals and all donations between spouses.
Estate Duty is levied on all estates
above R3,5 million at a rate of 20%. The most important exemptions
are bequests to a surviving spouse.
SECONDARY TAX ON COMPANIES (STC)
STC was payable by South African
resident companies at a rate of 10% on dividends declared on or
before 31 March 2012.
STC was replaced with dividends tax on 1
April 2012 and is levied at a rate of 15% on dividends paid by a
VALUE ADDED TAX (VAT)
VAT is levied at a rate of 14%. If a
Seller is a registered VAT vendor (normally developers are), the
Seller must pay VAT at 14% 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.
Transfer duty is levied as follows:
R0 - R600 000 of Purchase Price
R600 000 - R1 000 000 of Purchase price
R1 000 000 - R1 500 000
R1 500 000 and above
CAPITAL GAINS TAX
Capital Gains on the disposal of assets
are inlcuded in taxable income.
Maximum effective rate of tax:
Individuals and special trusts 13,3%
Other trusts 26,6%
Events that trigger a disposal include a
sale, donation, exchange, loss, death and emigration.
The following are some of the specific
R2 million gain or loss on the
disposal of a primary residence
Most personal assets
Payments in respect of original
long-term insurance policies
Annual exclusion of R30 000 capital
gain or capital loss is granted to individuals and special
Small business exclusion of capital
gains for individuals (at least 55 years of age) of R1,8 million
when a small business with a market value not exceeding R10
million is disposed of
Instead of the annual exclusion, the
exclusion granted to individuals is R300 000 for the year of
Exemptions include the first R2
million of any gain on the primary residence of a private
individual. The rate applicable to trusts can furthermore be
reduced to 13,3% by distributing gains to beneficiaries who are
In general, income tax is only payable
on the disposal of immovable property if the owner purchased and
sold the property in a scenario of profit making.
Income tax is imposed at the following
progressive rate, maximum 40%
Close corporations & Companies:
40% (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
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.
The number of shareholders in a Private
Company is unlimited.
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 "a trustee of a company to be formed" and only
after signature, the company can be formed and the contract
Should the Company later sell the
property, Capital Gains Tax at an effective rate of 18,6% on capital
gains, will be payable and to distribute the after tax profits,
at 15% will furthermore become payable. In total, tax of 30.8% will
be payable on gains when a Company sells a property for a capital
Contrary to shares in Companies, 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 with Companies
where creditors of shareholders can attach and sell the shares of
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 at a flat rate of 26,6%
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.
Lower income tax and capital gains
tax possible by distribution to beneficiaries
Saving on Estate Duty and Donations
Effective as protection against
No audit needed
No audit required
No complicated meetings and resolutions
Creditors can attach assets
Donations tax at 20% on donations above
R100 000.00 per annum
Estate Duty at 20% on assets in excess
of R3 500 000.00 on death.
First R2 000 000 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
Income tax is imposed at a progressive
rate, maximum 40%
R2 000 000.00 exemption on Primary
Lowest capital gains tax rate
Progressive rate of Income Tax
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
Should you require any further
assistance, we invite you to contact any of our conveyancers,