28 Feb 2014

Corporate & Commercial Department - The 2014 Budget & Immovable Property

by David Warmback, Partner, Durban,
Practice Area(s): Corporate & Commercial |

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

No changes have been proposed to transfer duty rates for the 2014 year.

The rates announced in 2011 will therefore continue to apply for the following year. 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
R0-R600 000 0%
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.

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%. 

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. It was reported that his committee is currently investigating the role of wealth taxes in the tax system, including the position of estate duty, its relationship with capital gains tax and the broader role of wealth taxes in a system aiming to balance efficiency and equity.

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 2014

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

Government property leases

In his speech, the Minister referred to an initiative raised in 2012 to be undertaken jointly with Minister Nxesi and his department to review the validity and cost effectiveness of all government property leases. The exercise has apparently exposed several deficiencies including accommodation that is unoccupied but being paid for, accommodation occupied by non-governmental entities, discrepancies between the size of accommodation occupied and what is paid for, marked divergences from market rates per square metre, procurement through inappropriate non-competitive procedures, missing or invalid lease agreements, and unsubstantiated payments to landlords.

The Minister advises that the intervention also identified the backlog of more than half of the lease portfolio reviewed and as a result of this initiative, Department of Public Works now has a turnaround strategy that will enable it to regularise the lease portfolio, while ensuring continuity of services to client departments.

The Finance Minister also announced that in connection with certain procurement reforms, that the Chief Procurement Office has been established, and has made progress on several fronts including the development of a standard lease agreement to address defects in government property transactions.

Reits

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.

One of the tests determining whether a company is a property company refers to the percentage value of the assets attributable to immovable property, as reflected in its financial statements in accordance with the Companies Act. However, the act does not apply to foreign companies and it is intended to rectify this and that financial  statements in line with international financial reporting standards prepared for foreign property companies will be taken into account.

Currency of re-acquisition of assets of individuals ceasing to be resident

A person who ceases to be a resident is subject to a deemed disposal and reacquisition of shares in a property company owning property in South Africa. However, it is not clear in which currency the shares re-acquisition takes place. This has an effect on the tax calculation when the shares are sold or otherwise disposed of by the non resident and it is proposed that this should be clarified.

Municipal taxation

The national framework for municipal taxation powers is determined by section 229 of the Constitution which empowers municipalities to impose a property tax and surcharges on fees for municipal services, subject to national regulation. However, in exercising their revenue-raising powers, it is stated that it is important that municipalities do not materially or unreasonably prejudice national economic policies and economic activities across municipal boundaries.

The Municipal Property Rates Act (2004) and the Municipal Fiscal Powers and Functions Act (2007) regulate municipal fiscal powers and functions.  The Department of Cooperative Governance administers the Municipal Property Rates Act and monitors municipalities’ compliance with the Act and its regulatory framework periodically, and guiding non-compliant municipalities to comply with the provisions of the Act and its regulations. The Department introduced the Municipal Property Rates Amendment Bill to Parliament in September 2013 to strengthen the regulatory, monitoring and reporting provisions of the Act, which in turn, is hoped, will improve its implementation and minimise legal ambiguities. As at February 2014, Parliament has already received public submissions on the Bill, held public hearings and considered the Bill.

Reforming the taxation of trusts?

Despite the statement last year that "in order to curtail tax avoidance associated with trusts", and that government was proposing several legislative measures during 2013/14, this has not occurred and the 2014 budget contains no further information or feedback on this topic.

As a reminder, the concerns and proposals highlighted in the budget last year 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.

Development charges

A development charge is a once-off infrastructure access fee imposed on a land owner as a condition of approval of a land development that will substantially increase the use of or need for municipal infrastructure engineering services. There is currently no legislation that adequately defines development charges and recognises their unique character as a multi-sector and upfront infrastructure charge. The National Treasury is amending the Municipal Fiscal Powers and Functions Act to incorporate the regulation of development charges. A national draft policy framework that will give expression to the implementation of   development charges has been developed and consultations with various stakeholders are under way.

Accelerating progress on the National Development Plan

Government has adopted the NDP as the country’s framework for economic and social transformation. The plan aims to accelerate growth to eliminate poverty and reduce inequality by 2030. Together with the New Growth Path and Industrial Policy Action Plan, the NDP lays the basis for economic transformation, stressing that change is required on many fronts to modernise the economy, address development challenges and improve the lives of South Africans. There will be extensive support for smallholder farmers, rural employment programmes and land restitution.

Public-private partnerships

Government sometimes enters into public-private partnerships (PPPs) that involve making land available to private parties. These arrangements are designed to support public-sector infrastructure projects while maintaining state ownership of the land on which the project takes place. The Income Tax Act requires ownership of land before any depreciation can be claimed for improvements on that land. This stipulation does not take into account how depreciation or capital allowances may affect the viability of PPPs. Government proposes that relief be afforded to improve the financial viability of these projects. In addition, the requirement of land ownership limits the incentive for improvements in urban development

zones and industrial policy projects. The merits of allowing deductions where the taxpayer is not the owner of the land will be considered

Employer-provided residential accommodation

The value of the fringe benefit for employer-provided accommodation is determined in relation to the “rental value” representing the value of the use of the accommodation. Depending on the circumstances in which the employer provided the accommodation, different methods are used to calculate the rental value. It is either calculated according to a specific formula using the income of the employee, known as the “remuneration proxy”, and the period that the employee used the accommodation; the aggregate of the total rentals payable and other associated costs; or the portion of the accommodation costs borne by the employer that pertains to the use by the employee. It is proposed that the valuation of the fringe benefit resulting from employer-provided accommodation be reviewed.

As a first step, the focus will be on accommodation rented from an unconnected third party, and shared accommodation. Should the actual value of the use of the accommodation be less than the calculated rental value, the employer may apply for a tax directive from SARS for a lower amount. In instances where the employer provides rental accommodation sourced from a third party to an inbound expat employee, the calculated rental value is often higher than the actual value. As a result, employers often apply for a tax directive to ensure that the employee is taxed as a fringe benefit on the actual (market) value of the use of the accommodation. It is proposed that if employer-provided accommodation is rented by the employer from an unconnected third party, the value of the fringe benefit should be the cost to the employer in providing the accommodation. In addition, there is no apportionment available where employees share employer-provided accommodation. It is proposed that a form of apportionment be considered.

Value-added tax and going concerns

VAT legislation and an accompanying interpretation note (number 57) on the VAT treatment when a going concern is sold require clarification. Immovable property sales involving both parties as registered vendors, where there is a lease in place in respect of the property, are regularly treated as sale of going concerns. The legislation requires the supply to be made to a registered vendor. According to the interpretation note, the recipient must agree that at the effective date it will be a vendor. The legislation will be amended to remove the uncertainty regarding whether a person must be a vendor before the acquisition of the going concern.

David Warmback, Partner

Contact: 031 575 7409 and warmback@wylie.co.za