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 2016.
The current (2015/2016) rates and brackets of transfer duty are as follows:
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The new (2016/2017) rates and brackets for transfer duty effective from 1 March 2016 will be as follows:
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For the second 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 has introduced a new bracket and category for transfer duty rates. The current highest bracket ceiling is 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 now provides for duty of R937 500 plus 13% of the property value above R10 million.
Currently, if one acquires a property for R15 million, the transfer duty is R1 487 500 but from 1 March 2016, duty on the same property will cost a purchaser R1 587 500 an increase in R100 000. However, looking back a year, if the same property was purchased on 28 February 2015, the duty would have been R1 117 000, a substantial R470 500 less than that applicable from 1 March 2016.
The proposed increase in transfer duty rates must be seen in the context of Revenue authorities needing to look at avenues for additional taxes against the background of tough economic times in the country. The Minister re-confirmed in his budget speech that our current taxes on wealth are under review by the Davis Committee, and the wealthy are further targeted with proposed higher capital gains inclusion rates as well as an increase in the annual amount above which capital gains become taxable.
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.
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.
Purchasers of residential properties in the upper R10 million and above price bracket after 1 March 2016 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.
Value added tax
No change is proposed to the value added tax rate of 14%.
Capital gains tax
Government proposes to increase the inclusion rate for capital gains for individuals from 33.3 % to 40 %, and for companies from 66.6 % to 80 %. This will raise 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 will increase from R30 000 to R40 000. The effective rate applicable to trusts will increase from 27.3 % to 32.8 %. These new rates will become effective for years of assessment beginning on or after 1 March 2016.
There are no changes 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 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 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%.
FURTHER FEEDBACK IN BUDGET SPEECH, BUDGET REVIEW AND ASSOCIATED DOCUMENTATION RELATING TO IMMOVABLE PROPERTY BEING CONSIDERED DURING 2016
The proposals that are under consideration and which involve or relate to immovable property, detailed in the Budget documentation, 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.
In the 2015 budget documentation 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.
The Minister of Finance in his recent budget speech acknowledged that our current taxes on wealth are under review by the Davis Committee. He then confirmed that higher capital gains inclusion rates are proposed, increases in transfer duties and that measures are proposed to strengthen the estate duty and donations tax.
Taxation of real estate Investments trusts
Qualifying distribution rule: Because recoupments such as building allowances previously claimed are included in the definition of gross income in section 1 of the Income Tax Act, they could affect the 75 % rental-income analysis used to determine qualifying distribution applicable to real estate investment trusts (REITs). It is proposed that the provisions relating to the qualifying distribution rule in section 25BB of the Act be reviewed to remove this anomaly.
Interaction between REITs and section 9C: The current provisions of section 9C of the Income Tax Act are inappropriate for REITs. Dividends received from REITs are taxable, but expenditure incurred to produce these taxable dividends is effectively not deductible. To resolve this anomaly, it is proposed that a provision be added to the act that section 9C(5) does not apply to shares in REITs.
Urban development zones
The urban development zone (UDZ) tax incentive stimulates investment in the construction and renovation of commercial and low-cost residential buildings in the inner city. In conjunction with other development tools, the incentive has helped municipalities promote urban renewal. To assist the many inner cities that remain derelict, it is proposed that the UDZ tax incentive be made available to more municipalities, subject to the application of a set of strict criteria and an adjudication process.
Tax treatment of land donated under land- reform initiatives
Currently, tax legislation provides tax relief for land donated for land reform. This tax relief does not extend to all government land-reform initiatives. It is proposed that the legislation be amended to cover other land-reform initiatives, such as those set out in the National Development Plan.
Expenditure on leases
The National Treasury and the Department of Planning, Monitoring and Evaluation have continued the project started in 2013 to review expenditure and make recommendations that improve spending quality. An additional 10 performance and expenditure reviews were completed in 2015/16, bringing the total to 30. Among them was a review of accommodation leases, which found that savings of as much as 20 % of current expenditure on property leases could be realised over the medium term if they were renegotiated to market rates.
Reforming the taxation of trusts?
Despite the statement in 2013 that "in order to curtail tax avoidance associated with trusts", government was proposing several legislative measures during 2013/14, this did not occur and the 2015 budget contained no further information or feedback on this topic.
As a reminder, the concerns and proposals highlighted in the budget in 2013 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 should 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 should be treated as ordinary revenue. This proposed amendment targets schemes designed to shield income from global taxation.
The 2016 budget provides that an important role of the tax system is to reduce inequality. Some taxpayers use trusts to avoid paying estate duty and donations tax. For example, if the founder of a trust sells his or her assets to the trust, and grants the trust an interest-free loan as payment, donations tax is not triggered and the assets are not included in his or her estate at death. To limit taxpayers’ ability to transfer wealth without being taxed, government proposes to ensure that the assets transferred through a loan to a trust are included in the estate of the founder at death, and to categorise interest free loans to trusts as donations. Further measures to limit the use of discretionary trusts for income-splitting and other tax benefits will also be considered.
Large integrated land development projects
The Minister in his budget speech mentioned that there were over 90 integrated land development projects currently underway, associated with transport investments valued at more than R130 billion are in progress to reshape our cities in partnership with the private sector, including:
- in eThekwini, the Cornubia node comprises 25 000 housing units. An inner city regeneration programme is also underway, including projects at Bridge City, Centrum, the Point and the interconnecting corridor;
- in the Tembisa Corridor in Ekurhuleni, R6.5 billion in public investment will leverage R8 billion in private sector investment to deliver housing, commercial and office facilities;
- in Cape Town, the N2 Gateway housing programme is continuing, together with redevelopment of the Voortrekker Road Corridor, Conradie Hospital, the Athlone Power Station and other sites;
- in Tshwane, investments are focused on the Mabopane Station Hub which is the gateway to the north for more than 150 000 passengers a day and has an informal market accommodating approximately 2500 trader;
- in Manguang, the R2.6 billion mixed use Airport Development Node is in construction. An inner city residential development is planned and the Vista Park and Brandkop projects will yield over 8 500 housing units at a total development cost of over R1.9 billion;
- in Johannesburg, the “Corridors of Freedom” connecting Soweto, Alexandra, Sandton and the Johannesburg CDB bring together public transport improvements, social amenities and partnerships with property developers to increase settlement densities and improve social mobility.