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Transfer Duty - Residential Companies & Close Corporations

Newsletter – Transfer Duty on Effected Transaction

An amendment to the Transfer Duty Act which took effect on the 13 th December 2003 imposes Transfer Duty on the sale of:

  1. Shares and Loan Accounts in a Company.

  2. Member's Interests and Loan Accounts in a Close Corporation

  3. “Sale” of a Trust, where the existing Trustees resign to be replaced by Trustees of the “Purchaser's” choice and the existing beneficiaries are removed and replaced.  Note that SARS regarded some of these transactions as being subject to Transfer Duty, although this is disputed.

where the subject property is Residential.
(the above three are hereinafter referred to as “effected transactions”)
The following points should be noted:

  1. The amending Act came into force on the 13 th December 2003.

  2. This means that effected transactions will now be subject to transfer duty.

  3. Where the Purchaser or transferee of the right is a Natural Person, transfer duty will be payable on the sale price or market value whichever is the higher, as follows:

    1. R0 to R500 000.00. Exempt

    2. above R500 000.00: to R1 000 000.00: 5%

    3. above R1 000 000.00: 8%

      4. See our cost calculator or cost tables.

  4. Where the Purchase or transferee of the right is a Company, Close Corporation or Trust (“Legal Person”), Transfer duty will be 8% on the sale price or market value whichever is the higher.

  5. In most cases transfer duty on the sale of Share Block is payable on the basis set out in 3 above, except where the Purchaser is a Legal Person, when 4 above will apply.  To the extent that transfer duty is payable, the transaction will be exempt from Stamp Duty.  If for example the consideration is less than R500 000.00, then as no transfer duty is payable, stamp duty will be payable instead.

  6. The provisions will apply to Residential properties and exclude business enterprises.  See below.

  7. The amendment Act will not have retrospective effect, and will only apply to Agreements relating to effected transactions signed on or after the promulgation of the Amendment Act.  (13 th December 2003)

  8. In most cases it is advisable (excluding where business enterprises are the subject of the transaction) not to conclude effective transactions where the property will consist of a purchaser's Primary Residence.  This is to take advantage of the R1.5 million rebate which applies to Primary Residences held by a natural person/s.  Normally, the Seller will be the Legal Person which is the registered ownner, who will in effect transfer the property out of the Legal Person into the name of the Purchaser.  The Legal Person will be liable for Capital Gains Tax.  See the separate discussion on this subject.

    An Explanatory Memorandum of South African Revenue Service (SARS) is quoted hereunder.

Extract from Explanatory Memorandum issued by SARS.

Previously, transfer duty on the acquisition of immovable property was avoided by placing the property in a company ( or Close Corporation) .  Persons who so hold their immovable property through a company dispose of the shares in the company to the person who wishes to acquire the property. As there is no registration of transfer in the Deeds Registry, no transfer duty was payable as the property remains registered in the name of the company. Similarly, immovable property is placed in a trust and which the “owner” is the beneficiary. When the person wishes to dispose of the property, there is merely a substitution of beneficiaries and there is no registration of transfer of the immovable property.  New provisions are, therefore, inserted in the Transfer Duty Act, 1949, to address this abuse.

Sub-clause (a ): A new definition of “acquired” is inserted to make it clear that the acquisition of a contingent right in a trust that holds either a residential property or share in a property owning company, is subjected to transfer duty.

Sub-clause (d ): A new definition “residential property company” was inserted to single out close corporations and companies where the only asset or the majority of the assets in value, consist of a house, thereby avoiding duty on the sale of the shares or members interest.  This includes where more than one company is owned outside of a group structure such as where a holiday home or a speculation house are held in two CC's.

The definition goes further to include passive land holding if it is zoned residential.
The intention is to exclude all business enterprises and is achieved by two tests. 

  1. The first deals with non VAT registered vendors and the other with VAT vendors.  The first test applies to apartments, hotels, motels and any business to the extent it is a business enterprise or has the markings of a business enterprise. Indicators of this would be:

    • It is a scheme of profit making as opposed to incidental income earned from the letting of the holiday home for a few months in the year.
    • Existence of income flow from holding the asset.
    • Frequency of transactions.
    • Existence of plausible benefits as to why the property should be held in this form other than for tax reasons.
    • Not occupied by the shareholder or trustee/beneficiary or any connected person.
    • The stated business in the Articles and Memorandum of Association or the Founding Statement.

  2. The second test applies to the same set of people, however, the business must be registered for Value Added Tax (VAT) where the property forms an indivisible part of the business activity, for example, a law practice in a residential suburb where the land, improvements and the business are VAT registered. Such a business is excluded from these amendments because on the sale of the enterprise VAT will be charged, or should the enterprise cease trading, VAT output must be accounted for on all assets held by that enterprise, including the land and improvements.

 

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