Property Taxation – Planning Ahead for South African Property Tax
Investing in property or simply buying a home is an exciting and often financially rewarding transaction. But one of the not-so-exciting, but vitally important parts of any property purchase is the calculation and payment of one or more different kinds of tax. Without proper advice on which taxes are payable and how much, buyers could find their purchase to be a very unrewarding transaction that could also land them in hot water with the Receiver of Revenue. Since the beginning of 2001 South Africa has seen significant changes to the tax system.
These include the move to residence-based taxation, the introduction of capital gains tax, and changes to transfer duty and secondary tax on companies. Adam Bekker, a partner in the tax department at leading corporate law firm Edward Nathan Sonnenbergs , advises that further changes to the tax system are also likely and that before acquiring a property, one should have a good understanding of the tax consequences and costs of the acquisition, holding and disposal of that property.
“Property ownership potentially exposes one to a spectrum of taxes such as income tax, capital gains tax (CGT), secondary tax on companies (STC), donations tax, estate duty, transfer duty or valueadded tax, stamp duties and municipal rates,” said Bekker. “Which taxes you have to pay, how much and when, depend on the manner in which you deal with your property and, to a large extent, on the way in which you structure your property holding,” he said.
“Whether transfer duty or VAT is payable on the acquisition of property, is determined by the identity of the seller of the property. If the seller is a vendor for VAT purposes, and the property forms part of that person’s business enterprise, VAT will be levied on the purchase price. If not, transfer duty is payable.”
In the buy-to-let scenario, the intention is that the property will yield a rental return over the period of ownership. “The rental receipts will be subject to income tax at the rate applicable to the property owner, although a deduction would be allowed for qualifying expenses”, Bekker advised. If the property is held in your own name, your taxable income will be taxed at your marginal tax rate. Furthermore, if you are at the maximum marginal tax rate for individuals (i.e. 40%) and the property is let as a secondary trade, then you might in certain instances not be able to take losses incurred into account against income from your primary trade or employment. If a company or CC holds the property, its taxable income will be taxed in the hands of that entity at a rate of 29%. If the property is held by a trust, its rental income will be taxable in the hands of the trust at a rate of 40%, unless it is distributed to a beneficiary of the trust in the same tax year that the income accrues, in which case the beneficiary will incur the liability to pay tax at their rate.
“Whether the proceeds on disposal of property are subject to income tax or CGT depends on the owner’s intention in acquiring and disposing of the property,” said Bekker. This is of course of relevance insofar as the effective rate of CGT is generally between 10% and 20%, whereas the effective rate of income tax is generally between 29% and 40%.
According to Bekker, there are no fixed rules as to what constitutes receipts of a capital or revenue nature. Where the intention in acquiring and selling the property is one of speculation or profit making, the proceeds will typically be of a revenue nature and be subject to income tax. Where the intention is one of long-term investment and capital appreciation, the proceeds will ordinarily be of a capital nature and subject to CGT. “Individuals are subject to CGT at a maximum effective rate of 10%, depending on the marginal rate of income tax applicable to them, and they are also entitled to an annual exclusion from CGT in respect of the first R12 500 of capital gains. Furthermore, in terms of the primary residence exclusion, the first R1,5 million of growth above base cost of the primary residence of an individual will not be subject to CGT,” he said. “Companies and CCs, on the other hand, are subject to CGT at the rate of 14,5%, and trusts at the rate of 20%, although trusts are able to distribute their capital gains and the associated tax liability to South African beneficiaries in much the same way as in the case of rental income.”
Bekker also pointed out the effect that STC has on holding property in companies and CCs. “As STC is imposed at the rate of 12,5% on any dividend declared by a South African company or CC, the tax rates applicable to their rental income and capital gains should be adjusted to take account of the additional STC that will be incurred in distributing amounts to their members,” said Bekker.
Finally, Bekker noted the value of undertaking an appropriate estate planning exercise when acquiring property as an investment. “As the value of a property grows, so does your potential liability to estate duty. The sooner you put arrangements in place to address this, the better the results will be,” Bekker said.
AUTHOR: Aliance Group Legal Team
“Information courtesy of the Alliance Group Property Investor Guide, available at all Alliance Group offices nationwide. To find out more, call 0861 ALLIANCE, or visit www.alliancegroup.co.za to download an electronic version“