Property Tax Overview

PROPERTY TAX OVERVIEW:

Arising out of improved tax collection efficiencies achieved by SARS, the 2006 fiscal year is way ahead of budget and it is generally felt that taxes will be eased in the next budget which is imminent.

To understand the dynamics of property tax it is necessary to have an overview of the capital and revenue taxes that apply to individuals, corporate entities and trusts and a basic understanding of VAT. They are presently as follows:-

Bear in mind that, to avoid a trust being taxed on the capital gain made on the disposal of its property, it can pass that gain on to the beneficiaries in order that the tax is charged at the individual rate of 10% as opposed to the trusts rate of 20%.

To determine whether a property transaction is subject to VAT it is necessary to establish if the seller of that property is registered as a Vendor and if the property being sold is part of the seller’s enterprise. If, yes, VAT is payable and not transfer duty. If not transfer duty is payable.

It is also necessary to establish if the purchaser is a registered vendor and if the property being sold will be used as part of his leviable supply. The transaction can then be treated as one between Vendors or at worst the purchaser of the property would pay the VAT and claim it as input VAT.

If transfer duty is paid then it would be claimable by a purchaser who is registered for VAT.

If the purchaser is not VAT registered then the transfer duty which he pays will be part of his costs of acquiring the property.

An aspect of capital gains tax which is frequently overlooked on the sale of a property is the nature of the gain: in other words is the gain of a revenue nature or of a capital nature? The test to apply is the reason for the seller purchasing the property in the first place. If he purchased it to keep, and only to sell in the event of unusual or unforeseen circumstances, then the gain on the sale is a capital receipt.

The treatment of the gain or of a loss which is of a capital nature falls to be dealt with in terms of the 8^th schedule of the Income Tax Act and a gain or loss of a revenue nature will be included in or deducted from the sellers gross income.

Of course the owner of a property can delay the gain if he structures his affairs well.

So when selling or buying a property it is always important to do your home work in advance of signing any offer to purchase. In South Africa, as opposed to a number of other countries, the rights and obligations pertaining to a property transaction are determined by the offer to purchase which, of course, has to be in writing.

In other words no sale of immovable property can take place without a written instrument (agreement) recording the sale conditions.

Remember that this does not apply to the sale of shares in a company or the sale of a member’s interest in a close corporation which may own immovable property.

Also remember that transfer duty is not payable in the case of the sale of shares in companies or the sale of members interests in close corporations that own property zoned commercial or business or industrial. It applies only to properties which are zoned for residential purposes.