Immovable Property
The term Immovable Property includes amongst others:
- vacant erf or erven;
- houses;
- flats and townhouses forming part of a sectional title scheme in terms of the Sectional Titles Act 95 of 1986;
- houses forming part of a group housing scheme;
- flats and townhouses forming part of a share block scheme in terms of the Share Blocks Control Act 59 of 1980; and
- accommodation in a housing development scheme as defined in the Housing Development Schemes for Retired Persons Act 65 of 1988.
ALTERNATE ENTITIES FOR ACQUIRING OWNERSHIP OF IMMOVABLE PROPERTY
WHICH ENTITY OF ACQUISITION TO CHOOSE ?
The advantages and disadvantages of the different entities for owning property are considered hereunder to assist in the selection of a suitable option.
1 PURCHASING AS AN INDIVIDUAL IN PERSONAL CAPACITY
Transfer duty is paid on a sliding scale, which is lower than the rate of 10% charged in respect of other legal entities.
The first R1 million of any profit made on the sale of the property is exempt from CGT, provided the property in question constitutes the individual's primary residence. This applies to South African residents only. 25% of whatever profit is remaining after the R1 million exemption is then added to the individual's income for the year, and taxed at the applicable marginal rate of income tax, resulting in a maximum net CGT cost of 10%. This is the lowest rate of CGT possible.
On death of the individual, the value of immovable property will be subject to estate duty, A R1.5million exemption is granted but the remaining value is taxed at 20%.
An important consideration is that the property lies at risk of attachment by the purchaser's creditors. For this reason, trading individuals may elect to register property in another entity.
PROS
- Lowest rate of transfer duty and CGT
- First R1 million of profit is exempt from CGT, if primary residence
- No auditors or accounting officer's fees
CONS
- R1 million exemption does not apply to non-residents
- R1 million exemption does not apply to second or further properties
- The properties may be attached by creditors
- Estate duty payable on death
2 PURCHASING AS A PRIVATE COMPANY
Companies purchasing immovable property pay transfer duty at a rate of 10% of the purchase price. Purchasers of shares in a residential property owning company now have to pay transfer duty, as set out in 2.1.1 above. Furthermore, should the company later dispose of the property, the company will pay CGT on 50% of all profit earned from the sale of the property which will be included in the company's taxable income and taxed at a flat rate of tax of 30% resulting in an effective tax rate of 15% of the capital gain.
Further, in order for the shareholder to acquire the profit realized on the sale of the company's asset, the company will have to declare a dividend which will be subject to secondary tax at the rate of 12.5%.
A significant benefit of this option is that the number of shareholders [which can include trusts, close corporations and companies] in a privately owned company is limited to 50, as opposed to a close corporation, which is limited to 10 natural persons only.
A company is a separate entity and the shareholder's assets may only be attached to cover debts incurred by the company if the individual had stood surety for the company.
At the time of acquisition of the immovable property, the agreement of sale can be signed on behalf of a company "about to be formed" and the contract ratified by the company after its formation – thereby effectively allowing nominations at the time of signature without the entity being in existence or named at the time of signature.
As a company is prohibited from providing financial assistance to a purchaser for the purpose of or in connection with the purchase of shares in that company, no bond may be registered over the company's property to finance the acquisition of shares.
A company's financial statements are required to be audited.
PROS
- Separate legal entity
- Number of shareholders only limited to 50
- Need not be in existence at time of signing agreement
CONS
- Higher rate of transfer duty and CGT than payable by individuals
- Dividends taxable
- No bond may be registered over company property to pay for acquisition of shares therein
- Annual audit is required
3 PURCHASING AS A CLOSE CORPORATION
Close Corporations face exactly the same transfer duty, CGT and tax implications as companies do. A close corporation, like a company is also a separate legal entity.
Only an accounting officer is required instead of an auditor, thereby reducing administration costs.
Like a company, a close corporation can ratify a contract signed by an individual prior to its formation.
Membership is limited to 10 natural persons.
PROS
- Separate legal entity
- Lower administration fees
- Need not be in existence at time of signing agreement
CONS
- Higher rate of transfer duty and CGT than payable by individuals
- Profits taxable
- Ownership restricted to 10 natural persons
4 PURCHASING AS A TRUST
Transfer duty is payable at a rate of 10% when a trust acquires immovable property. Trusts attract the highest rate of capital gains tax – 50% of al profits gained on sale of trust assets are included in the trust's taxable income and taxed at the rate of 40%, resulting in a net capital gains tax cost of 20% of the capital gain.
Trusts play an important role in estate planning as the property held thereby does not form part of an individuals estate on death, and accordingly benefits from estate duty savings.
A cost incentive is that trusts are not required by statute to be audited.
Since trusts are separate legal entities the trust assets cannot be attached by creditors of the beneficiaries, unlike shares or members' interest, which provides a safe option to protect assets from attachment.
Unlike close corporations and companies however the trust must be in existence at the date of signature of the agreement as one cannot act as a trustee for a trust in the course of formation.
PROS
- An effective estate planning tool
- Assets protected from attachment
- No audit is required
CONS
- Highest rate if CGT
- Higher rate of transfer duty payable than by individuals
- Must be in existence at the time of signing agreement of sale
CONCLUSION
The decision on the appropriate entity for the acquisition of immovable property is not a decision to be taken lightly. This information provides a brief guideline and it is recommended that the purchaser consult with an attorney prior to signing an agreement of sale in order to obtain expert advice having regard to the purchaser's personal circumstances.