Property Talk

The 2017 Budget Speech delivered by finance minister Pravin Gordhan last week included an amendment to the transfer duty calculation applicable to property transactions in South Africa, which are of interest to us as real estate professionals and to purchasers of property who are typically required to pay this tax. The amendments this year are relatively minor in that the threshold under which no transfer duty is payable has been increased from R750,000 to R900,000.

The rest of the sliding scale has been left unchanged since the year before. This sliding scale indicates that the R350,000 between R900,000 and R1,250,000 of the selling price attracts 3% transfer duty; the R500,000 between R1,25m and R1,75m, 6% transfer duty; the next R500,000 between R1,750,000 and R2,250,000 attracts 8% transfer duty; then everything between R1,250,000 and R10,000,000 is taxed at 11% and for every Rand over R10,000,000 of the purchase price, 13% in transfer duty is payable.

It is patently obvious that SARS is looking to increasingly tax the higher income brackets in South Africa in order to pay for the government structure and service delivery. The Financial Mail's review of the current budget for 2017 indicated that only 103,000 individuals in South Africa earn above R1,5m per annum.

These individuals have been targeted with the increase in the marginal personal tax rate from 41% to 45%, anticipating that an additional R4,4bn is to be raised from this relatively tiny group of tax payers. It is also largely this group of people that are the buyers of high-end residential property, such as a beachfront site in Zimbali.

To get an understanding of how transfer duty has changed over the past twenty years I have traced a typical Zimbali beachfront site since 1997 and calculated the transfer duty payable at a point in time for 7 typical transactions at the prevailing market selling price at the time.

In June 1997 I set a record of presenting an offer on a beachfront site in Zimbali for the grand sum of R1m. The transfer duty at the time for a private individual would have been R70,100 or 7,01% of the purchase price. For transactions where the purchaser was a legal entity transfer duty was a flat 10%. This differentiation continued for a while until it was scrapped in more recent times making the transfer duty the same regardless of the legal status of the purchaser.

By June 2001 this same beachfront site was valued at R1,500,000 and transfer duty would then have been R109,700 or 7,31% of the purchase price. By June 2004 the market was gaining momentum and the beachfront sites were selling at R3,000,000. Transfer duty at this stage would have been R222,900 or 7,43% of the price.

By June 2007 the market was steaming ahead and vacant land on the beachfront was trading at R7,000,000. This transaction would have attracted transfer duty of R505,000 or 7,21% of the price (actually a reduction). Interestingly at this stage the transfer duty for a legal entity as purchaser was even reduced to 8% from 10%.

By June of 2016 the same vacant land was trading at R10,500,000 and this level of sale would have attracted transfer duty of R1,002,500 or as much as 9,55% of the purchase price. This indicates a significant deviation to the effective rate of transfer duty and a dramatic increase of this tax on property transactions. There is no doubt this has impacted on the decisions by buyers and sellers to transact in property as they will first carefully consider the transaction costs involved. If the same vacant site was sold this year it would trade at R12m and the transfer duty payable would be a eye-brow raising R1,193,000 or 9,94% of the purchase price in terms of the transfer duty structure effective from 1st March 2017. We can therefore see that as property prices have inflated over time the transfer duty burden has become a far more significant cost to the transaction.

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