Corporate & Commercial Law Newsletter February 28th 2013, Immovable Property and the Budget February 27th 2013
IMMOVABLE PROPERTY AND THE BUDGET: 27 FEBRUARY 2013
A summary of some taxation issues affecting immovable property, including those dealt with in the budget, as well as some proposals affecting immovable property in the pipeline, are detailed below:
Unlike the quite substantial changes announced in 2011 to the rates of transfer duty for both individuals and corporate entities, no changes have been proposed for the 2013 year.
The rates announced in 2011 will therefore continue to apply. No transfer duty will be paid on properties with a value below R600 000. For property values above R600 000, the rate of transfer duty is 3% up to R1 million. For properties costing more than R1 million the rate is R12 000 plus 5% on the value between R1 million and R1.5 million. For properties over R1,5 million the duty is R37 000 plus 8% above that figure.
The rates for transfer duty for the following year therefore remain as follows:
|Property value||Rates of tax|
|R600 001 – R1 million||3%|
|R1 million to R1,5 million||R12 000 plus 5% on value between R1m and R1,5m|
|R1,5m and above||R37 000 plus 8% the value above R1.5m|
Value added tax
No change is proposed to the value added tax rate of 14%.
Capital gains tax
The maximum effective rate at which CGT is charged will remain at 13.3% for individuals and special trusts, 18.6% for companies and 26,7% for other trusts. The inclusion rate for individuals and special trusts remains at 33.3% and the inclusion rate for companies and other trusts, at 66.6%.
There are no changes to the capital gains exclusion amounts for individuals and special trusts of R30 000 annually, R300 000 on death, and on disposal of a small business when a person is over 55 years old, of R1 800 000. Also the maximum market value of assets allowed for small business disposal remains at R10 million.
There is no change to the primary residence exclusion where such primary residence is owned by a natural person or special trust, used for domestic residential purposes. The exclusion is R2 million on the calculated capital gain.
The increase in the estate duty threshold to R3.5 million in 2007 remains unchanged, as does the rate of estate duty, at 20%. The 2010 budget recorded that that both estate duty and capital gains tax which are payable upon death, are perceived as giving rise to double taxation, that estate duty is acknowledged to raise limited revenue, that it is cumbersome to administer and that its efficacy is questionable as many wealthy individuals escape estate duty liability through trusts and other means. It was proposed that taxes upon death will be reviewed and the 2011 budget provided that "the effectiveness of estate duty is being reviewed, with several options under consideration." There is no reference to estate duty in the 2013 budget review save in connection with proposed reforms with regards to taxation of trusts referred to below.
The threshold below which no donations tax is payable, remains at R100 000, with the rate unchanged at 20%.
Dividends received from SA companies and foreign company shares listed on the JSE were taxed with effect from 1 April 2012 and the dividends tax remains at 15%.
OTHER PROPOSALS RELATING TO IMMOVABLE PROPERTY BEING CONSIDERED DURING 2013
The proposals that are under consideration and which involve or relate to immovable property, detailed in the Budget Review, include the following:
Relief for low-cost employer-provided housing
Some businesses provide their employees with subsidised rental accommodation or home loans. There are also instances where employers build houses for their employees, initially on a rental basis, with the understanding that the house will become the property of the employee over time. Where an employer transfers a house to an employee at a price below market value, a taxable fringe benefit is triggered. The fringe benefit tax is often unaffordable for low-income employees. To contribute to a more stable workforce and adequate housing, government proposes to provide fringe-benefit tax relief for lower-income earners in such cases.
Unlisted real estate investment trusts
A real estate investment trust (REIT) is a listed company or trust that invests in immovable property, receives income from rental and distributes it to investors. A REIT can deduct such distributions if it resides in South Africa and at least 75 per cent of its gross income is rental income. This regime will be extended to unlisted REITs once they are subject to similar regulation as listed REITs. This form of regulation should initially be extended to wholly owned entities of private and government pension funds, as well as long-term insurers. Property syndication legislation is also proposed to protect investors from Ponzi schemes. REIT tax relief will similarly be extended to cover other real estate entities if they become subject to property syndication regulation.
Public benefit organisations
Donations to PBOs working in the areas of welfare and humanitarian activities, health care, education, conservation, environmental protection, animal welfare, and land and housing are deductible up to 10 per cent of taxable income in the year the donation is made. Donations in excess of this figure cannot be carried forward, which reportedly discourages large donations. Government proposes to allow donations in excess of 10 per cent of taxable income in any given year to be rolled over as allowable deductions in subsequent years. Also under consideration are rules governing the amount of funding that must be distributed where PBOs provide funding to other PBOs.
Reforms to the biodiversity tax incentive
Government proposes to modify the rules concerning the allowable deductions for setting aside private land as a protected area. The limitation of not allowing a rollover of donations in excess of 10 per cent of taxable income will be scrapped. Where land has been owned for many years, the original cost of the land is generally much lower than its current market value. Presently, the incentive is calculated using the lower of cost or market value of the protected area for 99-year contracts. Government proposes that the value for the purpose of this incentive should be the lower of the municipal or market value. Capital gains will be triggered, but the taxable proportion of these gains will be set off against the deduction allowed over a period. Certain conservation capital and maintenance expenditure will be allowed as deductible tax expenses.
Reforming the taxation of trusts
To curtail tax avoidance associated with trusts, government is proposing several legislative measures during 2013/14. Certain aspects of local and offshore trusts have allegedly long been a problem for global tax enforcement due to their flexibility and flow-through nature. Also of concern is the use of trusts to avoid estate duty.The proposals will not apply to trusts established to attend to the legitimate needs of minor children and people with disabilities. The proposals are as follows:
• Discretionary trusts should no longer act as flow-through vehicles. Taxable income and loss (including capital gains and losses) should be determined at trust level with distributions being regarded as deductible payments to the extent of current taxable income. Beneficiaries will be eligible to receive tax-free distributions, except where they give rise to deductible payments in the trust (which will be included as ordinary revenue).
• Trading trusts will similarly be taxable at the entity level, with distributions being regarded as deductible payments to the extent of current taxable income. Trusts will be viewed as trading trusts if they either conduct a trade or if beneficial ownership interests in these trusts are freely transferable.
• Distributions from offshore foundations will be treated as ordinary revenue. This amendment targets schemes designed to shield income from global taxation.
Tenant improvements to landlord land
Many sophisticated commercial tenants undertake substantial improvements (or wholesale construction) on the fixed property of a landlord, especially in the case of long-term leases. However, none of these improvements are depreciable because depreciation is generally allowed only on “owned” property, and tenant improvements are not technically owned by the tenant. This lack of depreciation is complicating many commercial arrangements. It is proposed that the ownership test for depreciation be replaced with “possession and use”. Associated amendments to the taxation of the lessor and treatment of leasehold improvements will be effected.
Temporary letting of residential fixed property
Developers that use the temporary relief provisions for the letting of residential fixed property are required to furnish SARS with a declaration containing certain information within 30 days of the supply. It is felt that it would be more practical and appropriate if the vendors retained the information as part of their normal recordkeeping (without being required to file a declaration with SARS).
Conversion from a share block scheme to a sectional title
The conversion of a share block company to a sectional title is considered a “non-supply” for VAT purposes (from an output tax point of view, no VAT is levied on the supply). From an input tax point of view, there is some debate on whether the shareholder is entitled to a notional input tax deduction on acquisition of the unit supplied by the share block company. It is proposed that this mismatch will be removed.
The supply of services by a sectional title association to its members in the course of the management of the sectional title body corporate is generally exempt from VAT. However, a home-owners association lacks a similar exemption (due to previous differences in how municipalities billed sectional title bodies corporate versus home-owner associations). It is proposed that this unequal treatment be removed.
The right of use of fixed property
The supply of a share by a share block company falls within the definition of “fixed property” in the VAT Act and is consequently subject to VAT at the standard rate (because a share block unit is roughly equivalent to a direct interest in property). However, a cooperative that supplies membership units falls outside the VAT Act. Property cooperatives will in the future be treated like share block companies.
David Warmback, Partner
Contact: 031 575 7409 and firstname.lastname@example.org