The way you structure a property purchase has a significant impact on the taxes you will pay when you buy or sell it, and hence the profit you will make on your investment.
Pieter Schoeman, a property attorney at law firm Kloppers Incorporated in Durban, says you should plan your property acquisition to ensure that:
- Title is held by a person or entity that best suits your needs;
- You pay the minimum transfer duty or VAT; and
- You pay the least amount of capital gains tax (CGT) when you sell the property.
The options for owning property include: buying it in your own name; buying it in a partnership (in which the property is registered in each partner's name); or buying it in a company, close corporation (CC) or trust.
The type of tax, and the amount of tax you will have to pay, when you buy or sell a property, depend on the legal structure in which you house the property.
Tax on buying a property
Transfer duty is a form of tax you pay on the purchase of a property. The duty is levied at different rates, depending on whether you buy the property in your own name, or in the name of a CC, a company or a trust.
Individuals pay transfer duty on a sliding sale, which depends on the purchase price of the property. No transfer duty is levied on properties with a value of up to R150 000. In the case of properties with a value of between R150 001 and R320 000, the transfer duty is five percent of the value of property above R150 000. In the case of properties valued at R320 001 and more, the transfer duty is eight percent of the value above R320 000 plus an amount of R8 500.
If you buy property in a CC, a company or a trust, the transfer duty is charged at a flat rate of 10 percent of the purchase price.
Schoeman says in certain instances you will not have to pay transfer duty when you buy a property, but you will pay VAT instead. VAT is currently levied on goods and services at a rate of 14 percent.
VAT applies when:
- The seller is registered with the South African Revenue Service (SARS) as a VAT vendor; and
- The sale is conducted as part of the seller's business activities.
For example, a developer whose business is developing and selling properties, will be registered as a VAT vendor. So, if you buy a newly developed property from a developer, you will not pay transfer duty, but VAT will be included in the purchase price.
The seller is responsible for making sure that the VAT is paid to SARS.
If you buy a business as a going concern, you may not have to pay transfer duty or VAT. An example would be the sale of a shopping centre, which rents out premises to tenants. Normally, VAT would apply to the sale of such a property, but, under certain conditions, the VAT will be zero.
The conditions that must be met for a transaction to be zero-rated are:
- The seller must be a VAT vendor;
- The buyer must be a VAT vendor;
- The enterprise must be sold as a going concern (in other words, the buyer must continue to run the business);
- The business must be earning an income at the time it is transferred; and
- The assets of the business must also be transferred to the buyer.
Schoeman says when you buy a business as a going concern, you can negotiate a lower purchase price, because the seller, anticipating VAT, has included it in the selling price.
Tax on the sale of a property
Whenever you dispose of an asset, including property, you have to pay CGT on the capital gain, or profit, that you make from the sale.
"Dispose" has a wide meaning and includes sale, donation, inheritance, the transfer of membership in a CC, the transfer of shares in a company and the change of the trustees in a trust.
To work out your capital gain, you take the proceeds (for example, the price at which you sold the property) and deduct the base cost. The base cost of an asset is the acquisition cost plus the expenses you incurred when you acquired the asset.
In the case of property, the expenses that you can deduct include the transfer duty or VAT you paid, the cost of any improvements you made while owning the property, fees related to the buying and selling of the property, such as advertisements and estate agent's commission, and installation costs (for example, the construction of a building on vacant land).
SARS gives you a break on CGT in the form of exclusions, and you are only taxed on a portion of your capital gain.
The rate at which CGT is levied depends on whether an individual or another legal entity disposed of the property.
Individuals have to include 25 percent of the capital gain in their annual income and pay tax at the applicable rate. The tax rate depends on your annual income. If you are on the top rate of 40 percent, you will effectively pay CGT of 10 percent (25 percent of 40 percent) of the capital gain on a property.
Companies and CCs must include 50 percent of a capital gain in their annual income. Companies pay income tax at 30 percent and trusts at 40 percent. The effective rate of CGT for companies and CCs is 15 percent (50 percent of 30 percent). In the case of trusts, the effective rate is 20 percent (50 percent of 40 percent) if the capital gain is retained in the trust. If not, the capital gain is taxed in the hands of the beneficiaries at the individual beneficiary's personal tax rate.
Individuals do not have to pay CGT on the first R1 million in profit they make on the disposal of a primary residence (the home in which you live). Individuals and trusts enjoy an annual exclusion of R10 000. At death, the exemption level is raised to R50 000 on the gains made in the year of death.
How to save tax
An individual establishes a company to buy a commercial property. The company buys the property for R2 million on May 1, 2002. It pays transfer duty of R200 000, spends R2.3 million in developing the property and sells the property for R10 million on June 1, 2004. The estate agent is paid R500 000 in commission.
The calculations below illustrate how the structure in which the property was purchased affected the tax paid. Had the individual bought the property in his own name, he would have paid only R504 710 in tax, a saving of R717 512. Had he bought the property in a trust, the beneficiaries who received the profits from the sale would have had to pay R496 999 in taxes, even less than the individual.
Company is the purchaser:
CGTR750 000
Secondary tax on companies
on dividends declared
(to distribute the profits)+ R472 222
Total taxR1 222 222
Individual is the purchaser:
CGT (assuming top marginal
rate of 40 percent)R504 710
Trust is the purchaser:
CGT (or R165 666 by each
of three beneficiaries)R496 999