Teams from SARS's audit department are trawling through trust deed documents at all nine offices of the Master of the High Court in an effort to trace outstanding transfer duties.
Homeowners around the country are receiving letters of demand from the South African Revenue Service (SARS) claiming transfer duty and penalties retrospectively on properties acquired through trusts.
A Durban woman has been sent a letter asking her to prove that she paid transfer duty on a property held by a trust of which she became a beneficiary in 1998. Unless she can provide proof of payment, she will have to cough up almost R79 000 in transfer duty and penalties.
A Johannesburg businessman received a telephonic request from SARS for copies of documents relating to a trust transaction that took place in 1998. Not long after the call, SARS sent him a bill for R145 000 for transfer duty and penalties.
Transfer duty is a tax that a buyer of property has to pay. Individuals pay between five and eight percent, depending on the value of the property. Properties bought by a company, close corporation (CC) or a trust are charged transfer duty of 10 percent of the value of a property. In the past, once a property had been transferred into the name of trust (or CC or company), new owners simply bought the beneficial interest in a trust, and avoided paying transfer duty.
David Warmback, an attorney at Shepstone & Wylie in Durban, says the attitude of the Receiver generally is that transfer duty is payable on transactions in which the beneficiaries of a trust (which owns a property) change. But, he says, it is difficult for SARS to find out if a trust has been sold - except in obvious cases such as when an estate agent advertises a property as owned by a trust and hence free of transfer duty.
Now it appears that the taxman is leaving no stone unturned to track transactions in which transfer duty was not paid. In some instances, buyers may not have been aware that they were breaking the law by becoming beneficiaries of a trust that owns a property, because the use of companies, CCs or trusts have been a selling point for estate agents.
Warmback says, as far as he is aware, there has not been a test case and it is arguable, from a legal point of view, whether or not duty is payable. "Someone needs to challenge the Receiver on this one to get clarity. The problem with the Receiver is his attitude of 'pay now, argue later'."
Fani Zulu, a spokesperson for SARS, says 134 letters of findings have been sent out. These letters become an assessment after 10 days if the trust does not prove that transfer duty has been paid.
"The letter of finding is intended to inform the taxpayer of our finding following the audit we have conducted in the Master's Office. The taxpayer is then given an opportunity to respond to the finding. Before sending out the letters, we make every attempt to contact the taxpayer so as to verify details, explain our findings, and give the taxpayer the opportunity to explain to SARS," Zulu says.
Two types of trusts
Kosie Louw, the general manager of law administration at SARS, says there are two types of trusts: vesting trusts and discretionary trusts.
Vesting trusts are trusts in which beneficiaries have vested rights. If the vested right includes a right to the capital (or fixed property), that right could be a personal right to claim ownership of the property. Such a right constitutes property for the purposes of transfer duty.
The view of SARS, Louw says, is that such transactions - in which beneficiaries with vested rights to a fixed property in a trust dispose of such a right - have always fallen within the normal provisions of the Transfer Duty Act.
Louw says transfer duty is not triggered when a property is transferred into your name at the Deeds Office. That, he says, is only a control mechanism. Transfer duty is triggered when you acquire the property. The date on which you acquire a property, by way of a transaction (for instance, when you sign a sale agreement) is the date when the transaction is entered into, even if the sale agreement is conditional. Sale agreements may, for example, be conditional on the obtaining of finance.
However, Warmback says there is no reference in the Transfer Duty Act to substituting beneficiaries in a trust, and SARS's attitude that the sale of beneficial interest is a "transaction" is open to debate.
"Transaction, in the Transfer Duty Act, is defined as an agreement whereby one party agrees to sell, grant, donate, cede, exchange, lease or otherwise dispose of property to another, or any act whereby any person renounces any interest in or restriction in his or her favour upon the use or disposal of property," he says.
Louw says a personal right to claim ownership constitutes property and the transfer of such a right is sufficient for SARS to claim transfer duty from you.
The other type of trusts, called discretionary trusts, are those where beneficiaries of the trust do not have a vested right, only contingent rights (a right which is dependent on something).
Amendments to the Transfer Duty Act contained in the Revenue Laws Amendment Bill deal specifically with discretionary trusts. The new provisions came into effect yesterday and apply to property acquired on or after December 13, 2002. The date of acquisition is the date on which both parties sign an agreement.
New law in operation
Louw says under the new laws, transfer duty will automatically become payable when there is a purchase of shares in a property-owning company, an acquisition of a member's interest in a property-owning CC, or a change in the beneficiaries of a trust that owns property.
The changes to the Transfer Duty Act are aimed specifically at companies, CCs and trusts where the only asset, or most of the assets, are residential properties or land zoned for residential purposes.
Shares held in a company or a member's interest in a CC are deemed to be property, and so disposing of such shares or member's interest will attract transfer duty.
The amendments also assume that property is acquired when any or all of the contingent beneficiaries in a trust are substituted or new ones are added. The new amendments will not affect cases where beneficiaries are added to a trust because of birth, adoption or extensions to the family due to a second marriage.
Normally, the buyer of a property is liable for transfer duty. But when there is a change of ownership in a company, CC or trust that owns a residential property, the liability to pay transfer duty is extended to a representative of the company, CC or trust, and the seller, who is now jointly and severally liable for the transfer duty should the buyer fail to pay it. Similarly, new beneficiaries of a trust will be liable for transfer duty.
Should they fail to pay the tax, the trust and the former and current trustees will be jointly and severally liable. But the public officer, the seller and the current and former trust beneficiaries have been given a specific right under the legislation to recover this money from the new shareholders, CC members or trusts beneficiaries, Louw says.
What is transfer duty?
Transfer duty is a tax which is payable when you buy property. When you buy property, the property is transferred from the name of the seller into yours, hence the name.
How trusts have been Taxed
Except for trusts set up in a will for minor children and those set up for mentally handicapped or disabled persons, trusts are considered taxpayers in their own right and seem to have been targeted by the government for harsher tax treatment than individuals and companies over the past few years, Peter Stephan, the marketing and services manager of Old Mutual Personal Finance, says.
- 1996: Although a maximum income tax rate of 45 percent was applied from the same threshold, to both individuals and trusts, the tax brackets for trusts resulted in trusts paying more than individuals. At the time companies paid a flat rate of 35 percent income tax.
- 1998: Trusts paid tax at 35 percent on the first R100 000 of taxable income and 45 percent on anything over this. Individuals paid on a sliding scale, with the maximum rate of 45 percent only applying to income over R120 000. Companies paid a flat rate of 35 percent.
- 2000: Trusts paid tax at 32 percent on the first R100 000 of taxable income and 42 percent on anything over this. Individuals paid on a sliding scale, with a maximum of 42 percent only applying to income over R200 000. Companies paid 30 percent.
- 2001: Trusts paid the same as in 2000, but individuals only paid the maximum rate of 42 percent on income over R215 000. Companies continued to pay 30 percent income tax. Capital gains tax (CGT) came into effect on October 1, 2001. Trusts paid CGT at a maximum of 21 percent, individuals at 10.5 percent and companies at 15 percent.
- 2002: Trusts pay more tax than individuals and companies.
- Trusts pay a flat rate of 40 percent on all taxable income; individuals on a sliding scale only pay 40 percent on income over R240 000; companies pay a flat rate of 30 percent.
- Trusts pay CGT at a rate of 20 percent, individuals at a maximum of 10 percent and companies at 15 percent.
In addition, trusts, unlike individuals, do not qualify for rebates, nor for the interest and foreign dividend exemption.
- Since 1993, trusts (and companies) have also paid transfer duty on immovable property at 10 percent, while individuals pay on a sliding scale, up to eight percent.