The South African Revenue Service (SARS) is claiming transfer duty of R130 million on property transactions made through some 1 600 trusts.
In a statement issued last week, SARS says it had hoped to have a test case on the issue of the liability of trusts to pay transfer duty but the trustees who initially challenged these payments have withdrawn their cases against SARS and have paid the assessments.
SARS says it will now be taking legal action against those trusts that have not paid the duty and interest owing on it.
Furthermore, SARS warns that it will be sending assessments to other trustees who were not previously assessed.
However, Jenny Faber, from the Johannesburg firm of attorneys, Korten, Hiepner Faber Gortz , says she takes issue with the SARS statement that trustees who initially challenged their liability for transfer duty have settled.
Faber has eight clients who may still take SARS on in court over the matter. "As yet, none of my clients have agreed to settle with SARS," she says.
In December 2002, the Transfer Duty Act was amended to make transfer duty compulsory where purchasers acquired property through companies, close corporations and trusts, where previously no transfer duty was payable.
Before the Act was amended, typically a buyer would acquire the shares in a company that owned the property, through taking over a member's interest in a close corporation that owned the property or become a beneficiary of a trust that owned the property.
In all three instances, the property remained registered in the name of the company, close corporation or trust. But even before the amendments to the Transfer Duty Act in 2002, SARS started issuing assessments on transactions involving about 1 600 trusts after trawling through the trust deeds at the Offices of the Masters of the High Courts around the country.
About two years ago, some of the trustees voiced their anger to Personal Finance claiming that SARS was attempting to apply amendment to the Act retrospectively. SARS however argues that it was not trying to apply the Act retrospectively. It says that the trusts were liable for the transfer duty even under the old provisions of the Act.
The reason that SARS regards the trusts as being liable for paying transfer prior to the amendment, is that fixed property transactions had taken place in all cases; and that either existing trusts had been replaced by new trusts because major changes had been made to the trust deeds, or new trusts, independent from the original trusts, had been created.
Offer to trust buyers
SARS has issued assessments to the 1 600 trusts at the rate of 10 percent of the value of the property owned by the trust, plus interest on that amount.
According to its statement, many trustees have asked SARS whether they can pay the duty at the lower transfer duty rate that applies to individuals, rather
than the 10 percent rate which applies to trusts.
The rate that individuals pay is a sliding scale depending on the value of the property. The maximum now is R7 000 plus eight percent on the value above R330 000 for properties valued at R330 001 and above.
SARS has agreed to settle these cases at the lower transfer duty rates, only if the trustees are prepared to register the properties in their own names.
The settlement with SARS will be on the basis that the trustees must pay the transfer duty and penalties on the original transaction, and then they must have arrange registration of the property from the trust's name into their own names.
The registration must be in the name of the person who bought the interest in the trust and financed the purchase of the property. Furthermore, this registration must take place before the end of December this year.
SARS is applying the principle that the purchasers of the property were individuals (rather than trusts) and that is why the property has to be registered in the name of the individual involved. The value used for transfer duty will be the amount for which the person acquired the interest in the trust.
SARS warns that it will not allow the registration of the properties into the names of children who may be beneficiaries of the trust because there are donations tax implications.
The capital gains tax (CGT) implications of settling with SARS in the above manner is as follows:
- Properties acquired through trusts before the introduction of CGT on October 1, 2001, and transferred from trusts to individuals on or before December 31, 2005 ( in terms of the settlement offer from SARS) will not be subject to CGT in the hands of the trust that owned it.
The value at which the property was acquired originally will serve as the new base cost of the asset in the hands of the individuals who receive registration of the property into their own names. Where the trust obtained a valuation for CGT purposes on or before September 30, 2004, the individual can use this value as the base cost.
- If the interest in the trust that owns the property was acquired after CGT was introduced, the trust will be considered to have sold the property to the individual, and the trust will have to pay CGT on any profits made.
The R1-million exemption that individuals enjoy on the profits they make from the disposal of their primary residence will not apply to the trust.
The individual (who acquired the interest in the property-owning trust) will be deemed to have bought the property on this date and the amount paid to acquire the interest in the trust will serve as the base cost of the property.
Leaving property in trust
SARS says if the trustees want to leave the property in the name of the trust, they will have to pay transfer duty at the rate of 10 percent. SARS has demanded payment of the duty and penalties and is proceeding with action to recover the amounts due.
Faber points out that the settlement offer from SARS could be prejudicial to trustees who have onsold the trust's property and who are, therefore, unable to comply with one of the terms of the offer which is to have the property transferred into their own names.