IMMOVABLE PROPERTY AND THE BUDGET: 25 FEBRUARY 2015

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:

Transfer duty

Some important changes have been proposed to transfer duty rates and brackets effective from 1 March 2015.

The current transfer duty rates were last adjusted in 2011, and the changes proposed in the latest budget are therefore the first since then.

The rates and brackets for transfer duty for the 2015 year will be amended as follows:

The current rates and brackets of transfer duty are as follows:

From 1 March 2015 purchasers of immovable properties will be paying very different transfer duties when acquiring immovable property than those applicable before 28 February.  The motivation from the fiscus for the quite radical proposed changes, is to provide relief to middle income households.

If a property transaction is not subject to VAT, a purchaser is usually liable (subject to certain exemptions) to pay transfer duty to SARS in terms of the Transfer Duty Act No  40 of 1949, based on a sliding scale, depending on the value of the property purchased.

Transfer duty rates and brackets were last adjusted for the 2011 tax year.

The effect of the changes to the transfer duty rates announced in the Budget on 25 February 2015 is that after 1 March 2015, purchasers will pay less transfer duty acquiring immovable property with a value up to approximately R2.25 million than they would prior to this date.

For properties with a value over R2.25 million, purchasers will pay progressively higher transfer duty from 1 March 2015. Properties with a value below R600 000 currently attract no transfer duty, and from 1 March 2015, this threshold will be increased to R750 000.

Transfer duty on properties purchased for R1,5m and R2,2m respectively prior to 1 March is R37 000 and R93 000 respectively, but this will reduce to R30 000 and R81 000 respectively, from 1 March. Transfer duty on properties purchased for R5m and R10m respectively prior to 1 March is R317 000 and R717 000 respectively, but this will increase to R387 500 and R937 500 respectively, from 1 March.

While the adjustment to the rates and brackets will certainly substantially assist middle income households and no doubt boost the residential property market in the R2,3m and below price range in particular, it is not anticipated that the fairly substantial increase in rates in the upper price bracket will have any major effect on that market, given the different income brackets of those purchasers.

Purchasers of residential properties in the upper price bracket after 1 March 2015 will obviously benefit further when purchasing properties directly from developers and other VAT vendor sellers, after the transfer duty rates are increased for higher valued properties.  Conversely there will be a greater difference between the transfer duty rates and VAT applicable to properties below R2,25m, after 1 March 2015.

Many industrial and commercial properties are owned by VAT vendors and sales of such properties attract VAT rather than transfer duty, so the adjustment to the transfer duty rates will not have such an impact on non-residential properties.

Transfer duty is minor source of revenue for the fiscus, and the adjustments proposed should have very little effect on total revenue collected from this source, given the averaging effect that the amended rates and brackets have across the spectrum of prices. The residential property industry in the lower and middle income category will no doubt be delighted following the Budget announcement on the adjustments to transfer duty.

Purchasers who are currently about to purchase properties have a very short window of opportunity to pay less transfer duty if they time their transaction carefully. If a purchaser is purchasing below R2,25m then it will benefit that purchaser to wait and conclude a sale agreement on or after 1 March 2015. On the other hand, purchasers in the R2,25m  and above bracket will pay less transfer duty if they conclude their sale agreements prior by 28 February 2015.  Purchasers must of course be careful of losing out on a transaction by delaying their commitment to purchase.

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, if following an increase in the marginal personal income tax rates, will be 13.65% for individuals and special trusts, 18.6% for companies and 27.31% 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.

Estate duty

The increase in the estate duty threshold to R3.5 million in 2007 remains unchanged, as does the rate of estate duty, at 20%. 

Donations tax

The threshold below which no donations tax is payable, remains at R100 000, with the rate unchanged at 20%. 

Dividends tax

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%.

FURTHER FEEDBACK IN BUDGET SPEECH, BUDGET REVIEW AND PROPOSALS RELATING TO IMMOVABLE PROPERTY BEING CONSIDERED DURING 2015

The proposals that are under consideration and which involve or relate to immovable property, detailed in the Budget Review, include the following:

Davis tax committee recommendations

The Minister of Finance appointed the Tax Review Committee in July 2013 headed by Judge Dennis Davis which has a broad brief to investigate aspects of the tax system and make recommendations for possible reforms.

The committee has noted that compared with rates in other countries, there appears to be some scope to increase taxes on capital income, marginal personal income tax rates and indirect taxes such as fuel levies and VAT. The committee’s interim report on small and medium-sized enterprises was released for comment in 2014, and its recommendations on changes to the turnover tax regime for micro businesses are included in these tax proposals. The committee has also published a report on base erosion and profit shifting. 

It was reported that the National Treasury expects reports on the overall tax system, VAT, estate duty, wealth and mining taxes, to be published soon and that these reports will inform policy considerations in the 2016 Budget.

Unlisted property–owning companies

Unlisted property-owning companies marketed to the general public or held by institutional investors do not qualify for the same special tax dispensation as listed real estate investment trusts (“Reits”).  Government proposes that unlisted property-owning companies should qualify for the same tax treatment if they become regulated. A regulatory framework for unlisted property-owning companies will be developed.

Reits

In 2012, a special tax dispensation for listed Reits was introduced in the Income Tax Act. The provisions of section 25BB will be refined to remove anomalies. 

Withholding on disposal of immovable property by non-residents

Section 35A of the Income Tax Act provides that a purchaser does not need to withhold tax from a deposit “until the agreement for that disposal has been entered into”. It is proposed that the wording should be amended to clarify the timing of the withholding. 

Definition of immovable property

To remove any anomalies, it is proposed that the definition of immovable property in paragraph 2(2) of schedule 8 be aligned with the definition in the Organisation for Economic Cooperation and Development’s model tax treaty, specifically the definition related to the right to work mineral deposits.

Transfer Duty Act definitions

The definitions of "date of acquisition" and "property" in the Transfer Duty Act (1949) need to be reviewed to align the terms with other legislative provisions.

Fixed property – cooperatives

The supply of a share by a share block company that confers the right to or an interest in the use of  immovable property is subject to VAT at the standard rate in terms of section 7(1)(a) of the VAT Act because it is specifically included in the definition of fixed property in section 1 of the Act. Similar rights or interests in the use of immovable property supplied by a cooperative, however, do not fall within the ambit of the definition of “fixed property”. To address this anomaly, it is proposed that the definition of “fixed property” in section 1 be amended to include a right or interest in the use of immovable property supplied by cooperatives or other entities entering into similar arrangements.

Prudential framework

A robust prudential framework will be applied consistently across the financial sector, including capital, liquidity and leverage requirements where appropriate.

In line with its more intensive approach to regulation, government is strengthening the supervision of all investment funds, starting with hedge funds. From 1 April 2015, hedge funds will be treated as collective investment schemes with appropriate governance and tax implications. The regulatory framework will also be updated to reflect future globally agreed standards. An appropriate treatment of unlisted property schemes will be introduced in 2015/16.

Municipal Property Rates Amendment Act

The Municipal Property Rates Act (2004), which is administered by the Department of Cooperative Governance, regulates the power of municipalities to impose rates on properties. The Act was amended through the Municipal Property Rates Amendment Act (2014), which will come into effect on 1 July 2015. The amendment Act improves transparency in the categorisation of property and the determination of rates for each property category, which strengthens oversight. The amendments provide for the property rates liability to be phased out over a five-year period on the following properties: national, provincial and other public roads; water or sewer pipes; railway lines; runways or aprons at national or provincial airports; and breakwaters, sea walls, channels and basins. These exclusions are made because of the importance of these types of infrastructure in enabling economic growth and social change. The Act also strengthens its regulatory, monitoring and reporting provisions, which in turn will improve its implementation and minimise legal ambiguities. The Department of Cooperative Governance will implement the regulatory framework that will give effect to the amendment act in due course.

Reforming the taxation of trusts?

Despite the statement in 2013 that "in order to curtail tax avoidance associated with trusts", and that government was proposing several legislative measures during 2013/14, this did not occur and the 2015 budget contains no further information or feedback on this topic.

As a reminder, the concerns and proposals highlighted in the budget in 2013 (and not dealt with in this Budget) were 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.