By David Warmback, Head of Corporate & Commercial
A summary of some taxation issues affecting immovable property, including those dealt with in the budget, are detailed below:
No changes have been proposed to transfer duty rates and brackets which remain the same as those effective from 1 March 2017.
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. The rates and brackets which applied from 1 March 2017 are 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 three years in a row, including last year, the Finance Minister 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 provided relief particularly for lower and middle-income households particularly, by raising the duty-free threshold on property purchases from R750 000 to R900 000 with effect from 1 March 2017.
The property industry, particularly those involved with residential property transactions will be pleased to note that no increases are proposed to transfer duty rates, particularly in current times with the property market and economy in general still struggling
Value added tax
The value added tax rate will however increase from 14% to 15% on 1 April 2018 thereby increasing the cost of living for all households. This increase in VAT will apply to sellers of immovable property who are VAT vendors and who are obliged to charge VAT on the sale of their property. Although this will mainly affect commercial and industrial property transactions, as most developers of newly constructed residential properties and units are VAT registered and are obliged to charge VAT on the sales of such property, this increase will be passed on to purchasers, making the purchase of property from VAT vendors more expensive from 1 April 2018.
While there has been speculation that government was going to implement a luxury VAT to make the tax more progressive, this option while considered, is not proposed. While Revenue acknowledge that inequality is crucially important, it is felt that the VAT system is not the best instrument for achieving redistributive goals. The Katz Commission (1994) had argued that “the disadvantages of multiple VAT rates outweigh the possible redistributive gains available from this option”. In 2015, the Davis Tax Committee found no global evidence that higher rates on luxury goods would meaningfully improve equity in the VAT system. The committee did observe, however, that multiple rates add significantly to the complexity and administrative burden of the tax. Furthermore, the committee pointed out that ad valorem excise duties are already charged on a number of luxury goods (thereby increasing the price on which VAT is charged).
Withholding tax on immovable property sales
Rates of withholding tax on immovable property sales by non-residents remain at 7.5 % for individuals, 10% for companies and 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.
Capital gains tax
No changes to any CGT provisions are proposed for the 2018/19 tax year.
The inclusion rate for capital gains for individuals is 40%, and for companies and trusts, 80 %. The maximum effective capital gains tax rate for individuals is 18%, for companies, 22.4 % and for trusts, 36%.
The annual amount above which capital gains become taxable for individuals is R40 000.
The capital gains exclusion amount is R300 000 on death, and on disposal of a small business when a person is over 55 years old, R1 800 000. Also the maximum market value of assets allowed for small business disposal is R10 million.
There are no changes 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.
In line with Davis Tax Committee recommendations, and in keeping with the progressive structure of the tax system, the 2018 Budget proposes to increase estate duty from 20% to 25% for estates worth R30 million and more. To limit the staggering of donations to avoid the higher estate duty rate, any donations above R30 million in one tax year will also be taxed at 25% per cent. Both measures will be effective from 1 March 2018.
The increase in the estate duty threshold to R3.5 million in 2007 remains unchanged, as does the rate of estate duty, at 20%, save for estates worth over R30 million.
The threshold below which no donations tax is payable, remains at R100 000, with the rate unchanged at 20%, save for any donations above R30 million in one tax year which will be taxed at 25% from 1 March 2018.
Dividends received from SA companies and foreign company shares listed on the JSE were taxed with effect from 1 April 2012 and the more information on the above
David Warmback, Head of Corporate & Commercial
+27 82 4437674