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:
Some important changes have been proposed to transfer duty rates and brackets effective from 1 March 2017, which surprisingly, and contrary to other proposed wealth tax increases such as an increase in the top marginal tax rate, and a hefty rise in dividends tax, include decreases in the rates of transfer duty.
The current (2016/2017) rates and brackets of transfer duty are as follows:
|Property value||Rates of tax|
|R0 – R750 000||0%|
|R 750 001 – R1.250 million||3% of the property value above R750 000|
|R 1 250 001 – R 1 750 000||R15 000 plus 6% of property value above R1 250 000|
|R 1 750 001 – R 2 250 000||R45 000 plus 8% of value above R1 750 000|
|R 2 250 001 – R10 000 000||R85 000 plus 11% of property value above R2 250 000|
|R10 000 001 and above||R937 500 plus 13% of property value above R10 000 000|
The new (2017/2018) rates and brackets for transfer duty effective from 1 March 2017 will be as follows:
|Property value||Rates of tax|
|R0 – R900 000||0%|
|R 900 001 – R1.250 million||3% of the property value above R900 000|
|R 1 250 001 – R 1 750 000||R10 500 plus 6% of property value above R1 250 000|
|R 1 750 001 – R 2 250 000||R40 500 plus 8% of value above R1 750 000|
|R 2 250 001 – R10 000 000||R80 500 plus 11% of property value above R2 250 000|
|R10 000 001 and above||R933 000 plus 13% of property value above R10 000 000|
For the third year in a row, the Finance Minister has in his budget, announced changes to the rates and brackets for the calculation of transfer duty. Substantial changes were made in 2015, the effect of which was that purchasers paid less transfer duty acquiring immovable property with a value up to approximately R2.65 million than they would prior to 1 March 2015, which constituted substantial relief. For properties with a value over R2.65 million, purchasers have paid progressively higher transfer duty from 1 March 2015.
The 2016 budget introduced a new bracket and category for transfer duty rates. The previous highest bracket ceiling was R2,25 million and above, where duty is calculated at R85 000 plus 11% of the property value above R2,25 million. A new 6th bracket provided for duty of R937 500 plus 13% of the property value above R10 million.
The 2017 budget provides relief particularly for lower and middle-income households particularly, by proposing to raise the duty-free threshold on property purchases from R750 000 to R900 000 with effect from 1 March 2017.
The effect of raising the duty free threshold is reflected in the table below:
|R1 500 000||
|R3 000 000||
|R7 000 000||
|R15 000 000||
R1 587 500
R1 583 000
The proposed transfer duty relief will be welcomed by all in the property industry, particularly purchasers of lower value properties who will find that the reduction in transfer duty will assist in making home ownership a little more affordable. The changes while having the most impact on lower value properties will effectively benefit all purchasers as they apply to all transactions over the new R900 000 threshold.
Purchasers who are currently about to purchase a property have a very short window of opportunity to pay less transfer duty if they are able to delay concluding a sale agreement until 1 March 2017, although they must be mindful of the possibility of losing a transaction by delaying their commitment to purchase.
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 acquired.
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.
Withholding tax on immovable property sales
To align with the increased effective capital gains tax rate, government proposes to increase the withholding tax on immovable property sales by non-residents. Rates will be increased from 5% to 7.5 % for individuals, 7.5 % to 10% for companies and 10 % to 15 % for trusts. This withholding tax is not a final tax but an advance payment of tax on the seller’s actual account of normal tax liability and paid by the purchaser to SARS.
Value added tax
No change is proposed to the value added tax rate of 14%.
Capital gains tax
In 2016 Government increased the inclusion rate for capital gains for individuals from 33.3% to 40 %, and for companies from 66.6 % to 80 %. This raised the maximum effective capital gains tax rate for individuals from 13.7 % to 16.4 %, and for companies from 18.6 % to 22.4 %.
The annual amount above which capital gains become taxable for individuals in 2016 increased from R30 000 to R40 000. The effective rate applicable to trusts increased from 27.3 % to 32.8 %.
There were no changes in 2016 to the capital gains exclusion amount of 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 remained at R10 million.
There were no changes in 2016 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.
No changes to any of the above CGT provisions are proposed for the 2017/18 tax year.
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 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 will increase from 15% to 20% from 1 March 2017.
FURTHER FEEDBACK IN BUDGET SPEECH, BUDGET REVIEW AND ASSOCIATED DOCUMENTATION RELATING TO IMMOVABLE PROPERTY BEING CONSIDERED DURING 2017
The proposals that are under consideration and which involve or relate to immovable property, detailed in the Budget Review documentation, include the following:
Clarifying the VAT treatment on leasehold improvements
The VAT Act does not currently provide guidelines in respect of the VAT treatment of leasehold improvements effected by a lessee to the leasehold property during the period of a lease agreement. It is proposed that amendments be made to the Act to clarify the VAT treatment in respect of the time and value of supply of leasehold improvements on leasehold property.
Refining measures to prevent tax avoidance through the use of trusts
In 2016, an anti-avoidance measure aimed at curbing the tax-free transfer of wealth to trusts through the use of low-interest or interest-free loans was introduced in the Income Tax Act. This anti-avoidance measure deems any interest foregone in respect of low-interest or interest-free loans to a trust to be donations that are subject to donations tax at a rate of 20%. However, the Budget Review notes that some taxpayers have already attempted to circumvent the anti-avoidance measure by making low-interest or interest-free loans to companies owned by a trust. To counter abuse, it is proposed that the scope of this anti-avoidance measure be extended to cover these avoidance schemes. In addition, it is proposed that the anti-avoidance rule should not apply to trusts that are not used for estate planning, for example, employee share scheme trusts and certain trading trusts.
Measures to reduce lease costs
The committees recommend that the National Treasury, working with the relevant departments, seeks to reduce the huge spending on leases of buildings and infrastructure.
The Department of Public Works is considering ways to reduce lease costs. Application of the user-charge model, which has been developed by the Property Management Trading Entity will enable the department to determine more accurately the cost of accommodation provided by the private sector, and use such knowledge as an instrument for negotiating more reasonable and affordable rentals. The department is also looking at providing accommodation using its own vast stock of immovable assets. Some of the buildings will need to be refurbished to bring them to the required standard for housing departments or entities, while in certain instances, like Statistics South Africa’s offices in Salvokop, new buildings will be constructed.
The Minister in his budget speech mentioned that it was expected that savings of between R2 and R3 billion in the property leasing sector would be realised, while releasing resources for greater employment and contracting in building maintenance and services.
Improving the management of government property
It is proposed that the Office of the Chief Procurement Officer, together with the Department of Public Works and all relevant stakeholders, speedily revamps systems for the effective management of government property. The Department of Public Works has embarked on several initiatives to facilitate improvements in the management of government property. The department, through its Property Management Trading Entity, is finalising and verifying its asset register, which has begun to provide a more accurate account of the number of buildings or immovable assets in its portfolio. The trading entity has developed a user-charge model, which will enable the department to determine the real costs of providing government accommodation. The Office of the Chief Procurement Officer, together with the Property Management Trading Entity, did a comparative analysis in 2015/16 of rentals paid by government versus market-related rentals. The sector has also been made aware of the reforms on procurement as well as government’s implementation of a new framework for leasing procurement. Talks have started with holders of large portfolios and landlords to renegotiate leases. A new property empowerment policy is being developed and a property management and leasing framework has been developed. The standard for leasing and letting for the public sector is expected to be issued by 1 April 2017 for use across government.
Proposed infrastructure spend
It is proposed that a total of some R947.2 billion will be spent by the Government in public service infrastructure over the three year medium-term expenditure framework period. This will include R35.9 billion for bulk infrastructure for municipalities, R3,2 billion for social housing, R63,4 billion to fund public housing and bulk infrastructure for low-income housing subsidy programmes, state owned enterprises spending R432,8 billion, provinces spending R198.2 billion and municipalities, R179.6 billion during the period.
The Department of Human Settlements have planned to commence with 25 catalytic development projects over the next 3 years which will be integrated mixed-use, mixed income settlement developments.
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