Tax and home ownership in South Africa

Tax and home ownership in South Africa ashley D

TAX AND HOME OWNERSHIP from www.husbandandwifeteam.com
Cape Town, February 2006:
These days it is seldom advantageous (from a tax point of view anyway) to register ownership of a private home in the name of a trust, close corporation or company. This has been a popular practice in the past but SARS have moved to close down the tax advantages that this practice once offered. According to RE/MAX of Southern Africa Regional Director, Bruce Swain, the advantage of the current position is that people are encouraged to simplify their affairs, so that actual control and use match legal ownership much more closely. According to RE/MAX Elite Broker/Owner and Conveyancing attorney, Grant Gunston, when one buys a property in the name of a trust, close corporation or company, one pays additional tax both when purchasing and when selling. From 1 March 2006, these entities pay a flat 8% transfer duty when purchasing (whereas private individuals pay transfer duty in accordance with a sliding scale of 0, 5 and 8%). On selling, these entities do not enjoy the exemption from Capital Gains Tax (CGT) which applies to private individuals who sell their primary residence (currently R1.5 million of the "profit"). The rate at which CGT is paid is also higher for legal entities than that which applies to private individuals, and there is the added problem of secondary tax on companies should one want to take the profits out of a company or close corporation, for use by the individual/s behind the entity. Gunston states that people were willing to pay the higher transfer duty in the past on the basis that they would make the difference back when they sell. (The theory was that by selling the company or close corporation that owned the property, they would be able to realise a higher price given that no transfer duty would be payable).
“Whether one actually achieved a higher price in practice is debateable, but in any event, the definition of "property" in the Transfer Duty Act has now been amended so that sales of legal entities that own residential property now also attract transfer duty - thus doing away with the transfer duty loophole” says Gunston. Having painted the above negative picture regarding home ownership in legal entities, it should be said that there are still valid reasons to use these entities for home ownership. A trust is appropriate for example, both as a way of protecting assets from future creditors, and also as an estate planning tool. People often have questions about how CGT applies where one claims the use of a home office as a tax expense against income, or where a portion of a home (e.g. a granny flat) is let out to tenants. This does not mean one looses the entire R1.5 million CGT exemption, but the income generating portion of the property will be liable for CGT - pro rata. Whether one qualifies for the CGT exemption is not about whether the property in question is the only property you own - it is about whether you actually live there. So it is possible for example to live in a rented flat as one's primary residence while owning a luxury home at the seaside, which one uses most weekends. The seaside home would not enjoy the CGT exemption. Occasionally income tax may be payable on the profits from the sale of a residential home - if SARS deems you to be a speculator or developer. If one buys and sells as a business, one may also be required to register as a VAT vendor and pay 14% of the selling price to SARS as VAT. Ashley D from husbandandwifeteam at remax advises to invest in specialised tax advice if this could apply to you.
About the AuthorHusband and Wife team selling property in Blaauwberg, Cape Town, South Africa for remax property associates. Check out property in blaauwberg, Cape Town at our site www. husbandandwifeteam.com