Fri, 14 May 2010 08:37 – iafrica.co.za
There are four main ways that you can buy and own property in South Africa and the decision on the appropriate entity for the acquisition of immovable property is not a decision to be taken lightly, says Peter Gilmour, Chairman of RE/MAX of Southern Africa.
He explains that South African law recognises two different types of “persons” — natural persons and juristic persons. “Natural persons are people who act and conduct business in their own name. Juristic persons are legal entities such as close corporations, companies and trusts.”
Andrew Heiberg, a director of the real estate business law firm Cliffe Dekker Hofmeyr, says that there are different tax and legal implications that apply depending on the investment structure that you use when buying property and as such it is highly advisable to consult with an attorney to find out which option is best for your particular needs.
Purchasing property as a natural person
This refers to when you buy property in your own name — as an individual and not as a legal entity such as a close corporation, company or trust. Transfer duty is paid on a sliding scale when you buy property in your personal capacity — properties priced between R0 and R500 000 are exempt, properties priced between R500 001 and R1-million pay five percent on the value above R500 000 and properties priced above R1-million pay five percent on the value between R500 001 and R1-million (i.e. R25 000) plus eight percent on the value above R1-million.
Heiberg explains that, provided the property is the buyer’s primary residence, the first R1.5-million of any profit made on the sale of the property is exempt from Capital Gains Tax (CGT).
Also, where the primary residence is sold for R2-million or less, the full capital gain will be disregarded. A total of 25 percent of whatever profit remains after the R1.5-million exemption and the natural person’s annual capital gain/loss exclusion (presently at R17 500) will, however, be added to the seller’s income for the year and taxed at the applicable marginal rate of income tax, resulting in a maximum effective CGT cost of 10 percent.
He says, however, that non-resident individuals could qualify for the primary residence exclusion in certain, limited circumstances. The non-resident would have had to use the residence as his/her main ordinary residence in order to qualify. The chances are slim that this would be applicable to a non-resident, but the possibility exists that it could apply.
With regards to estate duty, upon death of the owner the value of the immovable property will be subject to estate duty. This is payable within six months of death at 20 percent on estates in excess of R3.5-million.
Says Gilmour: “The major downside to owning property in your own name is that if you are self-employed and run your own business, if at any time you are unable to pay your creditors, the home you live in, as well as any other properties that you may own in your name, will become the prime target of your creditors and can be taken away from you.
Other cons include the fact that the R1.5-million CGT exemption does not apply if the property is not your primary residence as well as the fact that estate duty is payable on death.
Again, Heiberg notes that that non-resident individuals could qualify for the primary residence exclusion in certain, limited circumstances.
“On the plus side, however, purchasing property in your personal capacity boasts the lowest transfer duty and, if it is your primary residence, the lowest CGT too. Also, the investment doesn’t need to be audited which minimises administration costs,” he explains.
Buying property as a (Pty) Ltd
Private companies purchasing immovable property pay transfer duty at a flat rate of eight percent of the purchase price. They also pay a comparably high CGT with an inclusion rate of 50 percent and an income tax rate of 28 percent which translates into an effective CGT rate of 14 percent.
Since companies don’t die, no estate duty is payable.
Having said that, however, if an individual is a shareholder of the company the value of the shares and the loan account are deemed as assets in his/her estate and the value as verified by the company’s accountant, together with any amount owing by way of loan account, will increase the value of his/her estate. Also, a 10 percent secondary tax on companies (STC) is levied on all profits distributed in the form of dividends.
Says Gilmour: “A significant benefit of this form of ownership is that a private company can accommodate a maximum of 50 shareholders which can include private individuals, trusts, close corporations and companies. Also, a company is a separate legal entity and, as such, any shareholder’s assets can only be attached to cover debts incurred by the company if the individual has stood surety for the company. Today, most financial institutions insist on personal suretyships being signed by individual shareholders in respect of any loans made by the financial institution to the private company.”
Aside from the higher transfer duty and CGT, and taxable dividends, other negatives include the fact that companies have to be governed by the Companies Act 61/1973, need to be managed by a board of directors and the financial statements have to be prepared by an auditor and reviewed annually which makes the administration of this kind of ownership costly.
Heiberg notes that, in addition, subject to certain exceptions as set out in the Companies Act 61/1973, no financial assistance may be given by the company to a prospective shareholder for the purchase of any shares in the company and no bond may therefore be registered over company property as security for a loan by the company to pay for the acquisition of shares therein unless the company has complied with the requirements as set out in the Companies Act which includes a solvency and liquidity test as well as the requirement that a special resolution be passed by the members of the company and registered with the Registrar of Companies so as to authorise the transaction.
Purchasing property as a close corporation
Close corporations face the same transfer duty, CGT and tax implications as companies.
Like a company, a close corporation is also a separate legal entity. The only difference between buying in a close corporation and a company, explains Gilmour, is that close corporations are governed by the Close Corporations Act 69/1984, they are managed by members, ownership is restricted to a maximum of 10 natural persons and the financial statements have to be prepared by an accounting officer.
“There is no need to provide audited financials which substantially brings down the administration fees.”
Heiberg adds that although a company or close corporation cannot be a member of a Close Corporation, a Trust can in fact be registered as a member of a Close Corporation.
Purchasing property as a trust
Explains Heiberg: “The parties involved in establishing a Trust include the founder/settlor, trustees and beneficiaries. If you form a trust, you will be referred to as the founder or settlor of the trust and will need to appoint trustees in terms of the Trust Deed to manage the affairs of the Trust for the benefit of the beneficiaries that are named in terms thereof.”
Gilmour says that trusts play an important part in estate planning as the property held within a trust does not form part of an individual’s estate on death and accordingly benefit from estate duty savings.
Also, since trusts are separate legal entities, the property therein cannot be attached by creditors of the beneficiaries, providing a safe option to protect assets from attachment.
There are no audit requirements, although it is essential to administer the trust properly. Transfer duty is a flat eight percent; however, trusts attract the highest rate of CGT with an inclusion rate of 50 percent and income tax rate of 40 percent as well as an effective rate of 20 percent.
Heiberg adds that the trustees of a trust are required to administer the affairs of the trust for the benefit of the beneficiaries of the trust and therefore required to exercise their fiduciary duty with the same high degree of care, diligence and expertise as which may be reasonably expected of a person who has to handle the affairs of another.