A. ACQUISITION TAXES
The Salient Question is whether Vat or Transfer Duty is payable by the buyer on the Acquisition of Property.
1. The answer is determined by the status of the SELLER
· The status of the Purchaser then determines if the Seller can recover the VAT or Transfer Duty from the Receiver
· Section 9 (15) of the Transfer Duty Act states that no transfer duty is payable on the acquisition of property if the transaction is a taxable supply under the VAT Act i.e. supplied by a VAT Vendor
· If the seller is not a VAT Vendor, the transaction will be subject to Transfer Duty … or if the supply has been exempted in terms of section 12(c).
2. Criteria for VAT application (Section 7 (1)(a) VAT Act):
· If the supply is made by a vendor (developer / speculator) – he/she/it is obliged to register as a VAT vendor when the annual turnover exceeds R2.3mil (R 120 000 for a guest house/commercial accommodation)
· of goods or services (land / sectional title unit / shares in shareblock / any real right in any of these i.e a Sectional Title exclusive use area)
· in the course of or furtherance of any enterprise (regular or continuous activity / in SA / supply to another person / for consideration)
3. There are also instances where VAT exclusions will apply EVEN though the owner/seller is registered as a VAT vendor in terms of section 12 (c) of the VAT Act
· If the supply is made by a lessor of any accommodation in a dwelling AND the sale of that residential property will not attract VAT
· The supply of accommodation by an employer to its employees
AND the sale of a company owned house is used exclusively for employees’ accommodation
· Transfer Duty will therefore be payable by the purchaser on these sales.
4. Who pays the VAT?
· On the sale of a property the vendor supplying the goods (seller) is liable to pay VAT to the Receiver of Revenue. The price charged by a vendor is deemed to include VAT and therefore the buyer pays VAT to the Seller, who in turn pays it to the Receiver.
· When advertising or quoting a price, the price must include VAT, unless it states Net Exclusive Price + VAT and the total inclusive of VAT price is separately stated.
· If the sales agreement states the price as exclusive of VAT, the SELLER will be liable for payment of VAT and can only recover it from the purchaser in addition to the price IF THE CONTRACT EXPRESSLY PROVIDES for it.
· VAT on Rentals applies to commercial (not residential) rental enterprises, where rental turnover exceeds R2.3million per annum
5. When property is purchased as a going concern, in other words a registered VAT vendor sells an enterprise which can operate as a separate business, to a registered VAT vendor, the transaction will attract VAT at 0%.
· In order to qualify for a Zero rating the parties to the sale agreement must agree in writing that the enterprise is sold as a Going Concern.
· They must agree on the date of conclusion of the purchase that the property will be an income earning activity on date of transfer and all assets necessary for carrying on the enterprise must, at the same time, be disposed by the supplier/seller to the buyer.
· NB The sale of vacant land or a vacant building can never be Zero Rated
· If the property sold is let, the sale agreement must provide for the lease to be in existence at the date of transfer and that the lease is being disposed of together with the property (Occupancy needs to exceed 50%)
· NB The sale of a leased property to the existing tenant cannot be Zero Rated, and the sale of a lease-back to the seller cannot be Zero Rated
6. When is Transfer Duty payable by the purchaser?
· Transfer Duty is payable by the purchaser on date of transfer of the property
· It is payable on the price exceeding R1,210, 000 at 3% and the percentage increases on a prescribed scale up to 13% of the value exceeding R13,310,000
7. Transfer Duty exemptions for certain purchasers exist in the following instances:
· The state and para-statals
· Public charities
· Inheritances
· Surviving spouse: property acquired from the estate of deceased spouse.
· Joint owner acquiring full ownership of the property will pay Transfer Duty only on the ‘percentage’ acquired
· When partners, on dissolution of a partnership, divide their undivided shares in the partnership property
· Property acquired on conclusion of a marriage in community of property. (However, Transfer Duty is payable when a spouse acquires property in terms of an anti-nuptial contract.)
· Transfer of property arising from divorce
Kindly note that it is always in the purchasers interest to consult an auditor or tax consultant in the event that further or more intricate situations arise when purchasing an immovable property.
B. DISPOSAL TAXES
The Salient Question is whether Capital Gains Tax (CGT) or Income Tax is payable by the seller on the Disposal of Immovable Property.
1. The answer is determined by the status of the SELLER and whether the profit on the sale of a property is deemed to be capital or income?
· The property seller is liable for either income tax or CGT and may also be liable for VAT. The main (but not always easy) distinction lies in the owner’s intention.
· If the property was purchased with the intention of owning the asset as a long-term investment that either generates a regular form of income (letting) or will gain in value over time (capital growth), then SARS regards the proceeds of the sale as being of a capital nature and therefore not subject to income tax, but CGT.
· Should the property be purchased as stock with which to trade (speculate), the proceeds are deemed to be revenue and thus subject to Income Tax and not CGT
2. What is a Capital Gain and what is the amount payable?
· A capital gain (or loss) is the difference between the base cost of an asset and the proceeds received for the asset when disposed thereof.
· (Capital expenditure e.g. purchase price, improvement costs and legal fees can be added to capital expenses when calculating the base cost of a property for CGT purposes).
· Capital gains on the disposal of assets are included in taxable income. The events that trigger a disposal include a sale, donation, exchange, loss, death and emigration.
· In the case of a natural person or special trust the rate of CGT is 40% of the net capital gain for that year of assessment.
· In any other case (trusts, companies and small business corporations) the rate is 80% of the net capital gain for that year of assessment.
3. CGT Exclusions must also be considered where applicable:
· The first R3 million of the profit on the sale of a private residence is exempt if owned by a natural person or special trust as well as if the property is larger than 2 hectares, only the area that exceeds 2ha will be subject to CGT
· When a primary property is owned jointly, the R3mil exemption is apportioned between the joint owners on disposal.
· If a portion of the primary residence is used for business purposes, only that portion will be subject to CGT.
· An annual exclusion of R50 000 capital gain, or capital loss is granted only to individuals and special trusts
· The exclusion granted to individuals is R440 000 for the year of death.
· Property held as trading stock (income tax).
· Transfers under bequests, donations or between spouses (tax liability rolls over to next owner)
· Individuals aged 55 or older can exclude up to R2.7m when disposing of a small business with a market value under R15m
4. When is Income Tax payable?
· If a property is purchased by a natural person or trust with the intention of selling it and making a profit on the capital expended, the buyer will be liable for tax on the profit in accordance with the statutory/marginal tax rates as this income will be viewed as revenue and not capital gain.
· (Deductions of costs incurred to produce income can be made for municipal rates and taxes, sectional title levies, repairs and maintenance, interest on mortgage finance and managing agents’ commission)
· The income derived from the disposal of property by a property developer, is revenue and income tax will be payable.
· SA Residents are taxed on their worldwide income. Foreign taxes on that income are allowed as a credit against South African tax payable
5. How much Income Tax is payable?
· Tax Rates for Individuals & Special Trusts (ST: mental illness or serious physical disability) is currently rated on a scale from R1 – R245 100 at 18% of taxable income up to 45% of taxable income on income above R1 878 600.
· Tax Rates for Trusts (not special trusts): 45%
· Tax Rate for Companies/Cc’s: 27% of Taxable Income
· Small Business Corporations SBC): 27% of the amount above R550 000
6. Is tax payable if a property is donated and not sold?
· Donations Tax is payable on the value of any property disposed of as a donation.
· The tax is payable by the donor. It must be paid by the end of the month following the month in which the donation was made.
· The tax rate is set at 20% of the property value up to R30 million and 25% on properties valued at more.
· The following exclusions need to be noted:
· The first R150 000 of property donated in each year by a natural person is exempt from donations tax
· In the case of a taxpayer who is not a natural person (Companies and Trusts), the exempt donations are limited to casual gifts not exceeding R20 000 per annum in total
· Donations between SA tax resident spouses, South African group companies and donations to certain Public Benefit Organisations (PBOs) and to any sphere of government, are exempt from donations tax as well as contributions toward a bona fide maintenance of a dependant.
7. The taxation question also arises in the event that a non-resident seller sells an immovable property.
· A provisional tax WHT (Withholding Tax) is withheld on behalf of non-resident sellers of immovable property, to be set off against the normal tax liability of the non-residents.
· The tax to be withheld from payments to the non-residents is at a rate of 7.5% for a non-resident individual, 10% for a non-resident company, and 15% for a non-resident trust that is selling the immovable property.
· The buyer of a property for more than R2million, from a non-resident, must withhold an amount of WHT from the purchase price.
· The foreign seller will be required to register as a South African taxpayer.
· The seller may apply for a directive from the Commissioner of Inland Revenue that no amount or a reduced amount be withheld. (depending on their tax status at SARS)
· If the purchaser fails to withhold WHT, then the purchaser becomes personally liable for payment of the amount
Kindly note that it is always in the sellers interest to consult an auditor or tax consultant in the event that further or more intricate situations arise when disposing of an immovable property.
Author: Pam Snyman
Chartered Practitioner Real Estate (CPRE), Cert. Dir.
Member of the Institute of Directors of SA (IoDSA)
(MPhil, Dip Advanced Property Practice, Dip Property Investment & Valuation)
