Property Talk

Author: Andreas Wassenaar
Date: 2014-03-14

Property and taxes seem to be inseparable. Transfer duty is one of those nasty taxes that impact significantly on the transaction costs of trading property. The way it is calculated is on a sliding scale based on the value of the selling price. The first R600,000 is exempt.

From R600,000 to R1m, 3% is payable, from R1m to R1,5m, 5% is payable and everything over R1,5m attracts 8% in transfer duty. A quick way to calculate this is to take the purchase price, less R1,500,000, apply 8% to the balance and then add R37,000 as the applicable transfer duty for the first R1,5m.

For individual transactions this can be a very significant consideration and when we consider the macro value of all transactions, the amounts are huge. It was several years ago that the tax loophole of transacting in company and close corporations owning property to avoid paying transfer duty was closed.

For buyers and sellers looking to make and accept payment outside of the country for a property traded in South Africa, the amount payable as transfer duty remains and SARS will be watching you.

In his budget speech for this year, finance minister Pravin Gordhan left the transfer duty rates unchanged and indicated that he expected transfer duty revenues to increase at around 9-10% per annum for the next three years. This is a reasonably conservative estimate considering that transfer duty receipts increased by a massive 28% in the 2013/2014 tax year.

So how much does the government collect from transfer duty payments? Last year's transfer duty revenue amounted to R5,47bn up from R4,27bn in 2012/2013. This is still well below the peak of 2005/2006 when the treasury collected R8,51bn in transfer duty. By 2008/2009, the transfer duty receipts had dropped by 42% to R4,93bn.

Transfer duty receipts are an excellent proxy for the business cycle and when you consider the South African Reserve Bank leading business cycle indicator relative to it, it is surprising how closely they track each other.

The surge in January 2014 transfer duty payments by 49,4%, when measured on a year-on-year basis, is indicative of a strong property market recovery. This provides support to my view that we are in for an exceptionally busy 2014 characterized by resurgent buyers and stock shortages within certain product ranges and prices.

Capital gains tax is another tax property owners have to be aware of. The primary residence exclusion was kept at R2m. This means that the difference between your cost plus capital improvements over the time of ownership and the selling price (i.e. your gain) is reduced by R2m if the home being sold is your primary residence as defined by SARS.

Once this net gain is established an inclusion rate of 33,3% is applied if the property is registered in your personal name. This taxable amount is then applied to your income earned for the period and taxed at your marginal rate. For individuals a maximum effective capital gains tax rate of 13,3% of the gain applies.

An inclusion rate of 66,6% of the gain applies if the property is registered in a company, close corporation or trust. For companies and close corporations an effective capital gains tax rate of 18,6% applies and for trusts this effective rate is 26,7%. It therefore pays to plan your property ownership structure at the outset with the end in mind.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

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