This article was first published in the fourth quarter 2016 edition of Personal Finance magazine.
The 2016 Budget Speech saw the introduction of a new top level of transfer duty for properties with a value of more than R10 million. On March 1, 2016, the rate increased to 13 percent from 11 percent – a move critics described as the imposition of a “wealth tax”, although it was thought unlikely to impact significantly on sales in that segment of the market.
There was much better news for lower- and middle-income buyers in 2017, when the threshold at which transfer duty kicks in was raised, to R900 000 from R750 000.
What exactly is transfer duty and when does it apply to changes in the ownership of properties? The South African Revenue Service (SARS) defines transfer duty as “a tax levied on the value of any property acquired by any person by way of a transaction or in any other way”. For the purpose of transfer duty, property means land and fixtures and includes real rights in land, rights to minerals, a share or interest in a “residential property company” or a share in a share-block company.
Independent tax consultant Kari Lagler says that transfer duty should not be confused with transfer costs, which include all the expenses associated with a property transfer, such as the cost of registering a mortgage bond and conveyancing fees.
With lawyer Jason Freel of law firm Jason Freel & Associates, she explains that “residential property”, to which transfer duty applies, includes dwellings, holiday homes and apartments, as well as land zoned for residential use. It excludes apartment complexes, hotels, guesthouses and similar buildings that consist of at least five units that are rented out to at least five people who are unconnected with each other. It also excludes fixed property owned by a person who is registered as a VAT vendor if the property forms part of the vendor’s VAT enterprise.
Transfer duty is not levied where the value of the property is below the transfer duty threshold.
The rights and forms of ownership that give rise to transfer duty when they are created, or abolished, or transferred from one person to another, include:
* Limited real rights in land, including the right (granted to a family member, for example) to inhabit a property for a fixed period or life.
* Shares and members’ interests in what is called a “residential property company”. This is a company (including a close corporation or a foreign company, but excluding a real estate investment trust) that owns residential property, either directly or through a contingent right (in other words, a right that depends on a future event) via a discretionary trust, if the value of the property or contingent right exceeds 50 percent of the total market value of the company’s assets (excluding financial instruments and gold or platinum coins). Note that the value referred to here is the “fair value”, which is the true market value.
* Contingent rights to residential property held by a discretionary trust.
* Shares in a share-block company.
The implication of this definition of property, according to Lagler and Freel, is that transfers of certain types of property held through a company, close corporation or trust can be subject to transfer duty, even if the property itself is not sold – for example, the transfer is effected by acquiring shares, a member’s interest, or a contingent right in a discretionary trust.
Transfer duty is not triggered only when a property is acquired; it can also arise when the value of a property increases to the benefit of the existing owner as a result of a change in the rights or restrictions attached to the property. For example, if a right-of-way servitude over a property is cancelled, the value of the property to the owner is likely to increase as a result of the restriction being removed.
The Transfer Duty Guide published by SARS makes it clear that any indirect transfer of immovable residential property (usually to avoid transfer duty) is taxable in the same way as a direct transfer of the property would be taxed. In other words, the transfer of shares in a company, or a member’s interest in a close corporation, or a contingent right to property in a discretionary trust where the residential property is the only or the primary asset, should be taxed in the same way and based on the same “fair value” as if the property had been sold.
How is transfer duty determined?
From the early 1970s to 2011, companies, trusts and other non-natural (juristic) persons paid transfer duty at a flat rate that was higher than the progressive rates paid by natural persons. But since February 2011, both natural persons and juristic persons have paid transfer duty at the same progressive rates.
Transfer duty is based on the value of the property, not the price. In the case of a property acquired by way of a sale between a willing buyer and a willing seller dealing at arm’s length on the open market, SARS will generally regard the purchase price to be the value of the property. But this principle may not always hold true.
Freel says transfer duty is based on the highest of:
* The purchase price;
* The declared value, which is the value placed on the property by the parties to the transaction where there is no consideration; or
* The fair market value.
If SARS believes that the purchase price or the declared value is less than the fair value, it will require the transfer duty to be based on the fair value. This usually happens because the acquisition did not result from an “arm’s-length transaction between unconnected persons” – in other words, it was between people with shared interests, such as family members or business partners.
If you sell a property to a family member, to satisfy SARS that you have not understated the value of the property, you should obtain valuations from credible sources. These could be at least two different estate agents who are very knowledgeable about market trends in the area, or a sworn appraiser. SARS may require you to submit the valuations (or valuation), so keep a record of them.
Transfer duty is calculated on the cost of the property to the buyer, so if the seller pays the estate agent’s commission, as is usually the case, the amount of the commission is not included in the calculation of transfer duty, Freel says. For example, if a property is sold for R2 million and commission of five percent (R100 000) is paid to the agent by the seller, the transfer duty will be calculated on R2 million. If, however, the buyer pays the commission, the transfer duty will be calculated on the total cost to the buyer of R2.1 million.
Similarly, any expenses for which the buyer is liable in terms of the sale agreement, including commission to an auctioneer, and any arrear levies and municipal rates and tariffs (usually the responsibility of the seller), will be added to the purchase price when calculating the transfer duty.
However, if a property is bought at a sale in execution, only any portion of the commission that exceeds five percent of the selling price will be added to the selling price for the purposes of calculating transfer duty.
If you want to buy some or all of a seller’s furniture or appliances, Lagler and Freel suggest you make sure you conclude separate transactions for the property and the household items, or the value of these items will be included in the transfer duty calculation.
When is transfer duty due?
Transfer duty must be paid within six months of the date of acquisition, or the date on which an interest in a property is renounced. If payment is not made, you are liable for both a penalty and interest on the amount at a rate of 10 percent a year. The penalty and interest are calculated in respect of each completed month from the last day of the six-month period to the date of payment.
Most transfers result from sale-and-purchase agreements. In these cases, the date of acquisition is the date on which the transaction was entered into – that is, the date on which the last-contracting party signed the agreement. This rule applies regardless of whether the agreement is subject to any conditions, Freel says. For example, if a seller accepts an offer to purchase on November 20, 2016, subject to the buyer obtaining finance by December 1, 2016, the date of acquisition is November 20, not the date on which the buyer meets the condition. Similarly, an addendum that sets out further terms or amendments to the original agreement does not alter the date of acquisition.
Where a property is acquired by a means other than a transaction, the date of acquisition is the date on which the person who acquired the property became entitled to it. In some cases, this can be difficult to determine, and it may be up to the courts to decide.
Do not think you can take advantage of a change in transfer duty rates (for example, a lowering of the rate, or an increase in the duty threshold) by cancelling an agreement and then entering into a new agreement in respect of the same property. SARS says it will regard such a transaction as having been entered into for the purpose of evading or avoiding transfer duty.
Freel says the Registrar of Deeds will not allow a property transfer to be registered unless SARS issues a receipt showing that transfer duty has been paid, or has endorsed the receipt to indicate that the duty is not payable, because, for example, the transaction is exempt.
SARS points out that liability for transfer duty exists regardless of whether or not the transfer, or the termination of a right over the property, has been recorded at the Deeds Office. Failure to register the transfer does not affect the obligation to pay the tax.
When VAT replaces transfer duty
It is common for developers to market properties by highlighting that buyers will not pay transfer duty. Instead, buyers will pay VAT of 14 percent, although this is included in the selling price.
The Transfer Duty Act exempts from duty the acquisition of any property that falls into the category of goods supplied subject to VAT. The payment of VAT always takes precedence over transfer duty where the supplier is a VAT vendor.
Transfer duty is payable if the seller is a registered VAT vendor, but the property does not form part of the seller’s enterprise. For example, if a VAT vendor sells his or her private residence, transfer duty does apply, because the property is not being supplied as part of the vendor’s business. If the seller is not registered for VAT, but the buyer is and will use the property in the course of his or her VAT enterprise, the buyer will pay transfer duty, but will be entitled to claim a notional input tax credit calculated as follows: the purchase price x the tax fraction 14/114. For example: purchase price R5 million x 14/114 = R614 035. (The transfer duty would be R387 500.)
It is possible for a property purchase to be free of both transfer duty and VAT. In terms of the VAT Act, a transaction may be zero-rated (VAT applied at zero percent) if the following requirements are met:
- Both the seller and the buyer are registered as VAT vendors;
- The seller and the purchaser agree in writing that the property is sold as a going concern;
- The property is used for the purpose of earning an income;
- The sale of the property includes all the assets required for carrying on the income-earning activity; and
- The seller and the purchaser agree in writing that the purchase price is inclusive of VAT at the rate of zero percent.
A transaction cannot be subject to both VAT and transfer duty. However, you could incur both if you build a new home on undeveloped land and acquire the land and the dwelling in two separate transactions; for example, you buy a piece of land from a landowner who is not a VAT vendor and then use a builder who is a VAT vendor.
Property transfers are exempt from transfer duty in the following circumstances, Freel says:
* Marriage in community of property. If someone who owns a property gets married in community of property, his or her spouse will automatically become the owner of a half-share of the property, without paying any transfer duty.
* Divorce. Transfer duty does not apply if a property is awarded to a spouse in terms of a divorce order. The exemption applies to all marital regimes and to civil unions. However, if the property is not awarded to a spouse in terms of a divorce order and the parties reach an agreement outside of the formal divorce proceedings, the spouse who acquires the property will be liable for transfer duty.
* Inheritance. Heirs and legatees (beneficiaries) are exempt from paying transfer duty on property inherited from a deceased estate, regardless of the nature of their relationship with the deceased and irrespective of whether or not the deceased died intestate (without a valid will).
* Rectifying of registration errors. No duty is payable when an error in the registration of the property is corrected, provided the transfer duty applicable to the acquisition has been paid.
* Transactions declared void by a court. If a transaction is declared void by a court and the property is transferred back to the original owner, there is no transfer duty to pay.
* Transfers to trustees, administrators, beneficiaries and insolvent persons. Although transfer duty is payable on transfer to a trust, it is not payable in certain instances, such as when:
- The registration of a property is changed because a trust or an insolvent estate appoints a new trustee or administrator.
- The administrator of a trust transfers a property to someone who is entitled to it in terms of a will or other written instrument. This exemption applies only to testamentary trusts and inter vivos trusts where the beneficiaries are related to the founder of the trust.
- A trustee transfers property back into the name of a previously insolvent person.
SARS points out that, although an exemption from transfer duty and applying transfer duty at the zero rate (because the property value is below the transfer duty threshold) may have the same result, the distinction between the two is important. This is because, for example, if no transfer duty was paid because a property was acquired for less than R750 000, but it subsequently emerges that the property was sold for less than its fair value, the purchaser would become liable for transfer duty on the value above the threshold, unless the entire transaction qualified for one of the exemptions.
If a property purchase is cancelled before the transfer is registered at the Deeds Office, there is no liability for transfer duty if SARS is satisfied that the cancellation is legitimate. The buyer must relinquish all his or her rights to the property, which must revert completely to the seller, who must not be compensated for the cancellation. For example, there cannot be any obligation on the purchaser to pay rent to the seller until a new buyer is found. Transfer duty applies to any amount that the seller receives and retains despite the cancellation.
LIMITED REAL RIGHTS IN PROPERTY
Transfer duty may come into play when a person is granted a “limited real right” to use a property. There are various “personal servitudes” that allow the holder of the servitude to exercise some right, or derive some benefit, from a property. These include:
* Usufruct, where a person is granted the right to use and profit from a property, as long as the property is not damaged. The usufructuary may sell or mortgage his or her right without the owner’s consent, provided that this does not prejudice the owner’s rights.
* Usus, which is similar to a usufruct, but the holder’s rights are more restricted. The holder and his or her family may occupy the property, and may access the “fruits of the land” only for the purposes of satisfying their daily needs.
* Habitatio, which grants a person and his or her family the right to live in a property. The holder of the right cannot profit from the property.
The person whose ownership rights are restricted by a personal servitude is called the holder of the bare dominium – effectively, it means the right of ownership without the right of use.
Personal servitude rights provide the holder with far more security than a lease, and, in the case of a usufruct, the ability to profit from the property.
In order to calculate the transfer duty on a limited real right, you have to determine the taxable value of the right. This is complicated, based on the fair value of the property and the life-expectancy of the beneficiary (according to tables published in terms of the Estate Duty Act), so it is best done with the help of an attorney with expertise in property or wills and estates.