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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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