Guide to property vehicles and tax

 

 

GUIDE TO PROPERTY VEHICLES AND TAX

 

Guide to Mortage bonds Guide to conveyancing Guide to property vehicles and tax Guide to capital gains Guide to buying property as non-resident

 

GUIDE TO PROPERTY VEHICLES AND TAX 

 

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:

 

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.

 

Exemptions include the first R100 000.00 per annum donated by individuals and all donations between spouses.

 

ESTATE DUTY

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.

 

dividends tax

STC was replaced with dividends tax on 1 April 2012 and is levied at a rate of 15% on dividends paid by a company.

 

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

Transfer duty is levied as follows:

 

R0 - R600 000 of Purchase Price

Exempt

R600 000 - R1 000 000 of Purchase price 

3%

R1 000 000 - R1 500 000

5%

R1 500 000 and above

5%

 

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%

Companies 18,6%

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 exclusions:

  • R2 million gain or loss on the disposal of a primary residence

  • Most personal assets

  • Retirement benefits

  • 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 trusts

  • 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 death.

           

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 natural persons.

 

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 scenario of profit making.

Income tax is imposed at the following rates:

           

Individuals:

progressive rate, maximum 40%

Close corporations & Companies:

28%  

Trusts:

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 purchase property.

 

COMPANIES

 

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 ratified.

 

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, Dividends Tax 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 profit.

 

CON'S

  • 15% tax on dividend

  • Complicated structure

  • CGT higher than individuals, but lower than Trusts

 

PRO'S

  • Unlimited shareholders

  • Shareholders not liable for debt of company

  • Income Tax rate is lower than maximum rate of individuals

TRUSTS

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 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 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.

 

CON'S

  • Need to be in existence at time of signing an offer to purchase

  • Highest rate of Income Tax and Capital Gains Tax

 

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

 

PERSONAL CAPACITY

No audit required

No complicated meetings and resolutions needed

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 maximum 13,3%

Income tax is imposed at a progressive rate, maximum 40%

 

CON'S

  • All assets subject to attachment

  • Highest income tax rate

  • Estate duty and donations tax

 

PRO'S

  • R2 000 000.00 exemption on Primary Residence sale

  • Lowest capital gains tax rate

  • Progressive rate of Income Tax

 

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.

 

 

Should you require any further assistance, we invite you to contact any of our conveyancers, namely:

 

Eddie Albertyn

eddie@cwmalan.co.za

 

Marieke Ferreira

marieke@cwmalan.co.za


 



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