Ensure a Transfer Duty with No Surprises Part 3
I have recently been inundated by elderly parents wishing to transfer their immovable property to their children before they pass away. I reminded the parents that if the children are not liable to pay for the property, the transaction may be deemed to be a donation by the South African Revenue Services (SARS), and they would be liable for donations tax. As stated in Part 1 of this article, transfer duty is levied for the benefit of the National Revenue Fund on the value of a property acquired by any person by way of a transaction or in any other way. A donation of immovable property falls within this definition and the transaction will therefore attract transfer duty. To illustrate that this would be a costly affair, consider the following example: should the property be valued at R2 million, the transfer duty payable would be R41 625. SARS would furthermore require donations tax to be paid on the value of the property, less the annual exemption of R1 million at 20% i.e. R380 000. The parents would be ill-advised to do so and should rather bequeath the property to their children in their wills due to an exemption on paying transfer duty contained in the Transfer Duty Act 40 of 1949 (hereinafter referred to as the “Act”). Section 9(1)(e) of the Act states that an heir or legatee who acquires the property of the deceased, whether by intestate or testamentary succession or because of the re-distribution of the assets of a deceased estate, is exempt from the paying of duty. As the bequest is testamentary in nature and not a donation there will be no donations tax payable. The conveyancing fee for the transfer of the property is an estate cost/disbursement and is not for the account of the beneficiary. This is one of a myriad of exemptions in the Act. No duty is payable in respect of the acquisition of property by the government, provincial administration, and a municipality. Similarly, a public benefit organisation is defined in the Income Tax Act 58 of 1962. This includes any institution, board or body which is exempt from tax in terms of Section 10(1)(cA)(i) of the aforesaid Act and which has its sole or principal object carrying on any public benefit activity contemplated by the Act. If a property is acquired for the purpose of a public hospital, for example, there will be no transfer duty levied. An exemption from paying transfer duty is also applicable in the following circumstances: If a divorce occurs and one spouse becomes the sole owner of a property that was originally registered in the name of the other spouse. If a surviving spouse becomes the sole owner of a property that was originally registered in the name of the deceased spouse, and the property is transferred to them as a result of death. If one spouse had already acquired a property before getting married, and they later get married in community of property, the other spouse automatically acquires an undivided half-share in that property by operation of law. Any company in terms of both an amalgamation transaction and an asset-for-share transaction as set out in Sections 44 and 42 of the Income Tax Act of 1962. In the event of a testamentary trust where trust property is transferred by the administrator/trustee as stipulated by the will. Where the acquisition of the property, which is for purposes of the Value-Added-Tax Act 1991, is a taxable supply of goods to the person acquiring such property. This is why developers can advertise that there is no transfer duty payable on the advertised price of the unit, as an exemption applies. If a person who owns a share in a share block company decides to convert their right to use a specific unit of immovable property into full ownership of that unit, as allowed by the Share Blocks Control Act 59 of 1980. Keep in mind that acquiring a property may trigger numerous duties and affect both the purchaser and the seller. To avoid any surprises in this regard, one should seek sound advice from a legal or tax practitioner. WRITTEN BY GRANT HILL While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.
What is a “transaction” for transfer duty purposes?
According to reports, given current low interest rates, there have been an uptick in property transactions. Therefore, it is worthwhile considering the potential impact of any transfer duty taxes to be imposed on such transactions. The Transfer Duty Act imposes a transfer duty on the value of any property acquired by any person by way of a transaction, or in any other manner, or on the value by which any property is enhanced by the renunciation of an interest in or restriction upon the use or disposal of that property. For this reason the underlying concept of acquisition and important definitions in establishing whether there is a liability for transfer duty must be considered. The following concepts are key elements: “acquisition”, “date of acquisition”, “fair value”, “property”, “residential property”, “residential property company” and “transaction”. The last of the concepts, being a “transaction”, requires special attention. What constitutes a “transaction” A “transaction” includes not only an acquisition by way of purchase, donation, exchange, or any other modes of acquisition, but also any act whereby the value of the property is enhanced through the renunciation of any other person’s interest in, or restriction upon, the use of or disposal of the property. Furthermore included in this definition are transactions involving the acquisition or renunciation of registrable personal servitudes. A positive personal servitude is where the owner of the land burdened by the servitude must allow the holder of the servitude to exercise some right or benefit over the land in question. Examples include rights of usufruct, habitation, usus, right of way, right to collect firewood, power line servitudes, etc. A negative personal servitude prohibits the landowner from exercising a right that is accepted as inherent in the ownership of the property. In other words, these types of servitudes amount to registrable restraints or veto rights, which prohibit the owner of the land from doing something which would usually be permissible. Examples include: prohibiting the owner from subdividing the land without the necessary consent; restricting the height of buildings or prohibiting more than one building to be erected on the land; and prohibiting the transfer of the land without the consent from the Home Owners’ Association etc. A negative personal servitude can be created in the deed of transfer if it can be enforced by some person who is mentioned in the servitude and that person has accepted the right. This is often applied in the case of the creation of restraints enforceable by Home Owners’ Associations. However, no separate creation or registration event is necessary where the restraint is created by statute such as, for example, by Municipal Ordinance. Property transactors should therefore be vigilant of any potential transfer duty costs in respect of their transactions as it could lead to an unintended transaction cost when not properly managed. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)