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| Guide to property vehicles and tax | |||||||
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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) Secondary tax on Companies and Close Corporations is levied at a rate of 10% on dividends declared by such entity. This will be replaced with a tax in the hands of shareholders at 10%.
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 If the Purchaser is a natural person, transfer duty is levied as follows:
R0 - R500 000 of purchase price: Exempt R500 000 - R1 000 000 of purchase price: 5% R1 000 000 and above: 8% If the Purchaser is a trust, company or close corporation: 8% of purchase price.
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: 10% Close corporations & Companies: 14% Trusts: 20%
Exemptions include the first R1.5 million of any gain on the primary residence of a private individual. The rate applicable to trusts can furthermore be reduced to 10% 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
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.
Contrary to a close corporation, a Company is a complicated structure and a yearly audit is required.
The number of shareholders in a Private Company is limited to 50, as apposed to a CC which is limited to 10.
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.
Transfer duty at the rate of 8% of the Purchase Price, is payable when a Company buys a property or shares in a residential property owning Company, Close Corporation or Trust. On the first R1 000 000.00, this rate is the same for Close Corporation and Trust, but much higher than the rate for individuals. Above R1 000 000.00, the rate is the same.
Should the Company later sell the property, Capital Gains Tax at an effective rate of 14% on capital gains, will be payable and to distribute the after tax profits, STC at 10% will furthermore become payable. In total, tax of 21.8% will be payable on gains when a Company sells a property for a capital profit.
CON'S
PRO'S
CLOSE CORPORATIONS From a tax perspective, there is no difference between Close Corporations and Companies. A Close Corporation is also a separate entity and shareholders (members) are not liable for the debt of the Close Corporation. The investment purposes, the Close Corporation is far less complicated than a Company and no yearly audit is required, saving costs.
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 with 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. Trusts face exactly the same transfer duty as Close Corporations and Companies, i.e. 8% A trust is taxed at a flat rate of 20% 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
PRO'S
PERSONAL CAPACITY No audit required No complicated meetings and resolutions needed Creditors can attach assets No transfer duty on first R500 000.00 of Purchase Price and only 5% on the Purchase Price between R500 000.00 and R1 000 000.00 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 ondeath. First R1 500 000.00 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 10% Income tax is imposed at a progressive rate, maximum 40%
CON'S
PRO'S
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:
Adriaan Groenewald
Lynelle Kok
Eddie Albertyn |
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