Category Archives: Tax

VAT increase and the effect on property transfers and the registration of transfers before and after 1 April 2018.

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The increase was announced in the Minister of Finance’s Budget Speech on 21 February 2018. The standard rate of VAT will change from 14% to 15% on 1 April 2018 (the effective date). 

How will this VAT increase affect property transactions, property registrations and estate agent commissions?

Question 1: How will the rate increase work generally for fixed property transactions?

The rate of VAT for fixed property transactions will be the rate that applies on the date of registration of transfer of the property in a Deeds Registry, or the date that any payment of the purchase price is made to the seller – whichever event occurs first. (See, however, the exception in Question 2 below where registration (delivery) of the fixed property occurs on or before 23 April 2018.)

If a “deposit” is paid and held in trust by the transferring attorney, this payment will not trigger the time of supply as it is not regarded as payment of the purchase price at that point in time. Normally the sale price of a property is paid to the seller in full by the purchaser’s bank (for example, if a bond is granted) or by the purchaser’s transferring attorney.

However, if the seller allows the purchaser to pay the purchase price off over a period of time, the output tax and input tax of the parties is calculated by multiplying the tax fraction at the original time of supply by the amount of each subsequent payment, as and when those payments are made. In other words, if the time of supply was triggered before 1 April 2018, your agreed payments to the seller over time will not increase because of the increase in the VAT rate on 1 April 2018.

Example:

A vendor sells a commercial building and issues a tax invoice to the purchaser on 10 January 2018. If the property will only be registered in the Deeds Registry on or after 1 April 2018 and payment will be made by the purchaser’s bank or transferring attorneys on the same date, then the time of supply will only be triggered at that later date. In this case, VAT must be charged at 15% as the rate increased on 1 April 2018 which would be before the time of supply. It does not matter that an invoice or a tax invoice was issued before the time of supply and before the VAT rate increased. The tax invoice in this case would also have to be corrected as it would have indicated VAT charged at the incorrect rate of 14%.

See also the next questions below for the rate specific rule that provides an exception for the purchase of “residential property” or land on which a dwelling is included as part of the deal.

Question 2: Is there a rate specific rule which is applicable to me if I signed the contract to buy residential property (for example, a dwelling) before the rate of VAT increased, but payment of the purchase price and registration will only take place on or after 1 April 2018?

Yes. You will pay VAT based on the rate that applied before the increase on 1 April 2018 (that is 14% VAT and not 15% VAT). This rate specific rule overrides the rules as discussed in Question 1, which applies for non- residential fixed property.

This rate specific rule applies only if:

  • you entered into a written agreement to buy the dwelling (that is “residential property”) before 1 April 2018;
  • both the payment of the purchase price and the registration of the property in your name will only occur on or after 1 April 2018; and
  • the VAT-inclusive purchase price was determined and stated as such in the agreement.

For purposes of this rule, “residential property” includes:

  • an existing dwelling, together with the land on which it is erected, or any other real rights associated with that property;
  • so-called plot-and-plan deals where the land is bought together with a building package for a dwelling to be erected on the land; or
  • the construction of a new dwelling by any vendor carrying on a construction business;
  • a share in a share block company which confers a right to or an interest in the use of a dwelling.

Question 3: How will the VAT increase affect the seller of the property and estate agent commission?

Two possible scenarios can apply:

Scenario 1:

Should the contract of sale read that a percentage commission plus VAT is payable, that will be calculated at 14% if transfer takes place before 1 April 2018 and at 15% when registration takes place on or after 1 April 2018.

The net result is that the seller (who sold prior to 31 March 2018) will receive a lower net amount on the selling price because of the increased VAT, should transfer take place after 31 March 2018.

Scenario 2:

Should the contract of sale refer to a fixed commission amount inclusive of VAT, the opposite will apply. The seller will receive the same amount, but the agent will receive less because of the increased VAT.

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For more information on the VAT Increase, download the SARS VAT Increase general guide and FAQs here:

Please contact us should you have any specific questions.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Zero-rated VAT for a commercial property transaction

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B2The area of zero-rated VAT for a commercial property transaction can be confusing and must be properly understood if one wishes to avoid confusion and delays. “Previously, it was common industry practice that a brief clause or addendum was utilised with the agreement of sale for a commercial property transaction in order to apply for the zero-rating of VAT,” says Jason Gregoriades, a member of the Rawson Property Group’s Commercial Business Development Team in Cape Town. These previously used methods are, however, no longer acceptable due to a more stringent set of requirements by SARS.

Misconceptions

Some misconceptions must first be dispelled, with regard to zero-rated VAT transactions, before looking at this subject in any depth. “The structuring of the sale of a commercial property with the VAT rated at 0%,” Gregoriades explains, “is a benefit offered by SARS to the seller and buyer of a specific property, should certain criteria be met to their satisfaction.”

First, it is often presumed that if VAT is applicable to a commercial property transaction, it will be simple to structure the Agreement of Sale in order to qualify for the VAT to be rated at zero percent. Sadly, this is not the case. Second, there is the misconception that if one correctly structures the agreement of sale that the transaction qualifies for a zero-rating of VAT, that there are no additional costs relating to the transfer of the property. This is also most definitely not the case.

Facts

To begin with, a tax clearance certificate is required for the transfer of a property, thus problems and delays may arise in the event where either of the legal entities’ tax affairs are not up to date. Thereafter, SARS has a number of specific criteria which must be met in order for a commercial property transaction to be considered for a VAT rating of 0%.

“The agreement of sale must be property structured,” states Gregoriades, “containing alt the necessary information and specifics. Regarding the other costs applicable to the transfer of the property, such as the Deeds Office fee and the additional respective clearance certificates, these costs will still be applicable and payable should SARS permit the transaction to benefit from a zero-rating for VAT.

SARS Requirement

“SARS‘ current requirements for the transaction of a commercial property sale to be considered for a zero VAT rating, are quite specific and important to know,” says Gregoriades. These requirements include, but are not limited to the following:

  • All necessary information to be provided as part of the original agreement of sale and not as an addendum or annexure.
  • Both parties must be VAT vendors, thus, it is recommended that both parties include in the agreement their VAT registration numbers, a declaration that they are still registered for VAT and that their tax affairs are up to date.
  • The nature of the contract must take the form of a sale of business which includes the property, as opposed to the traditional sale of property only. Both parties must state their agreement that the enterprise will be sold as a going concern and that a zero rating of VAT will be applied. In this case, the business practice is the letting of space within the property and the business itself is often described as a rental enterprise.
  • The entire business, including any part of it which is capable of separate operation, must be disposed of as part of the transaction. In other words, the sale of the enterprise must include the property and all existing contracts must remain in place, such as the cleaning and security services.
  • The business must be an income generating enterprise at the time of sale, with a strong likelihood that this income generation will continue up to the date of transfer and beyond.

The Risk

Should the application for a zero VAT rating be deemed unsuccessful by SARS, they have the authority to effect that the full VAT amount be applicable to the sale. A clause to this end must be included in the agreement, stating that the purchase price will increase to cover the potential addition of VAT to the sale price. “Buyers and sellers must be aware of the implications of this possibility,” says Gregoriades, “should their submission be rejected by SARS for whatever reason.” “One needs a well- constructed agreement of sale, making sure all the boxes are ticked”, suggests Gregoriades. “to take advantage of the zero- rated VAT benefit offered by SARS.” In order to ensure all the criteria are met, it is recommended that you enlist the aid of an experienced commercial agent.

Reference:

  • eProperty News

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

The link between CGT and Income Tax

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CM_08_A3The name “Capital Gains Tax” (CGT) can create the impression that CGT stands on its own as a separate tax from the rest of the taxes but this is not the case. CGT forms part of the Income Tax system and capital gains and capital losses must be declared in the annual Income Tax return of a taxpayer.

If a taxpayer is not registered for Income Tax

If a natural person is not registered for Income Tax and his/her taxable income consists only of a taxable capital gain or a deductible capital loss, the amount of which is more than R30 000, the person will have to register as a taxpayer with SARS. In addition, the new taxpayer will have to submit an Income Tax return for that tax year.

If a taxpayer is already registered for Income Tax, they don’t have to register for CGT separately as CGT forms part of Income Tax.

Tax treatment of capital gains in three steps

The first step is to calculate the capital gain according to the provisions of the Income Tax Act, 58 of 1962. A discussion of the formulas to calculate the amount of capital gains and capital losses fall outside the scope of this article.

The second step is to reduce the capital gain with any exclusions which might be applicable. Please contact your tax advisor to find out if you qualify for any CGT exclusions.

Step three will be to include the taxable amount of the capital gain in the taxable income of the taxpayer. There are different inclusion rates for the following categories of taxpayers:

  • For natural persons, deceased or insolvent estates, and special trusts the taxable inclusion rate is 33,3% (increased to 40% from 1 March 2016). In other words, 33,3% of the aggregate capital gain will be added to the taxable income of the taxpayer and the taxpayer will have to pay more income tax.
  • Companies, close corporations and trusts (excluding special trusts) have a taxable inclusion rate of 66,6% (increased to 80% effective from 1 March 2016). This means that 66,6% of the aggregate capital gain will be added to the taxable income and taxed at the normal income tax rate of the taxpayer.

As a taxable capital gain will be added to the taxable income of a taxpayer, it will have an effect on certain deductions in the income tax calculation while other deductions will not be affected.

The following tax deductions for individual taxpayers will not be affected by the inclusion of a taxable capital gain in the taxable income of the taxpayer:

  • Pension fund contributions
  • Retirement annuity fund contributions

Tax deductions that will be affected by the inclusion of a taxable capital gain in an income tax calculation are the following:

  • Medical expenses (only applicable to individual taxpayers)

If a taxpayer’s medical deduction is subject to the 7,5% of taxable income-limitation, the deductible amount for medical expenses will become smaller if a taxable capital gain is included in the taxable income.

  • Section 18A donations

A taxpayer can include the taxable capital gain in taxable income before calculating the 10%-limit for the tax deduction of Section 18A donations. The allowable tax deduction of these donations will then increase by 10% of the amount of the taxable capital gain.

Tax treatment of capital losses

Capital losses may not be deducted from taxable income but must be set off against current or future capital gains. If there is insufficient capital gains to offset the full capital loss in the current tax year, the unclaimed balance of the capital loss is carried forward to the next tax year(s) until it has been fully offset against future capital gains.

As a capital gain/loss can have a material effect on a taxpayer’s liability for Income Tax, it is crucial to calculate these amounts accurately and take advantage of all the exclusions that might be applicable to the taxpayer. For further assistance regarding any aspect of capital gains/losses, please contact your tax advisor.

Reference List:

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

Selling of assets by individuals: when will it attract cgt?

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CMulder_04_A4Individuals who are residents for the purpose of the Income Tax Act, 58 of 1962, are liable for CGT (capital gains tax) on the disposal of South African and foreign assets. In addition, non-residents who dispose of immovable property in South Africa are liable for CGT as well.

As a disposal is the event that can trigger a taxpayer’s liability for CGT, it is important to know what type of transactions SARS will view as a disposal. The following actions are considered to be a disposal for CGT purposes:

  • Selling of an asset
  • Donating an asset
  • Destruction, scrapping or loss of an asset
  • Abandonment of an asset
  • Change in the use of an asset

Please note: The above actions are not a complete list of what constitutes a disposal. Please contact your tax adviser for more detailed information.

The rule of thumb is that if an asset is disposed of it will be subject to CGT, except if the capital gain/loss is specifically excluded. A capital gain/loss on any of the following disposals will not trigger CGT:

1. Disposal of a primary residence

The capital profit/loss on the disposal of a primary residence will not be taxable for CGT purposes if all the following requirements are met:

  • The proceeds are not more than R2 000 000, and
  • It is owned by a natural person (not by a company, close corporation or trust), and
  • The owner or his/her spouse normally lives in the house as their main residence, and
  • More than 50% of the house is used for private purposes.

It is also useful to know in which circumstances, upon disposal of a primary residence, a capital profit/loss, or a portion thereof, will be taxable for purposes of CGT. If any one of the following circumstances are present the capital profit/loss, or a pro rata portion thereof, will be taxable for CGT purposes:

  • If the proceeds is more than R2 000 000, the amount of the capital profit/loss exceeding R2 000 000 will be taxable.
  • When a property is bigger than 2 hectares, the portion of the capital gain/loss relating to more than the first 2 hectares, will be taxable.
  • Where a person or his/her spouse did not live in a primary residence for any period after 1 October 2001, the primary residence exclusion will not be allowed for that time period.
  • If any part of a primary residence was used for trade purposes (e.g. if you used your study to run a business from), the portion of the primary residence exclusion relating to the part of the primary residence used for business purposes will be taxable.

2. Disposal of personal use assets

The disposal of personal use assets which are owned by a natural person and not used for trade purposes, will not give rise to a liability for CGT. Some examples of personal use assets which are excluded for the purpose of calculating a potential CGT liability, are the following:

  • Personal belongings used more than 50% for personal purposes, for example a car, a caravan, an art collection or household furniture.
  • The capital gain/loss on the disposal of a boat up to a maximum length of ten metres and which was used for private/personal purposes.
  • Aircraft with an empty weight of 450 kilograms or less.

Please note: The above-mentioned circumstances is not a complete list of exclusions on the disposal of personal use assets. Please contact your tax adviser for more detailed information.

3. Disposal of an interest in a small business

The exemption of the capital gain/loss is limited to R1 800 000 if:

  • The gross asset value of the small business is less than R10 000 000, and
  • The individual is:
  • a sole proprietor or partner or has held 10% or more of the shares in the small business for five years or more, and
  • is at least 55 years old, and
  • suffers from ill-health or infirmity, or deceased.

4. Disposal of assets in a registered micro business, provided that the assets were used for business purposes

5. Receiving lump sum payments from certain approved retirement funds

6. Receiving the proceeds from certain endowment or life insurance policies

  • Second-hand policies are not excluded unless they are pure risk policies with no investment/surrender value.

7. Compensation received for personal illness or injury

8. Winnings and prizes from certain games and competitions e.g. Lotto winnings

Although the above exclusions are very specific, it is still possible to plan a transaction in such a way that will minimise the taxpayer’s liability for CGT. If you need more information on this topic, please do not hesitate to contact us for professional assistance and advice.

Reference List:

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Capital Gains Tax and the sale of a property

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A3B_newCapital Gains Tax was introduced on 1 October 2001. Capital Gains Tax is payable on the profit a seller makes when disposing of his property.

What is meant by Capital Gain?

A person’s capital gain on an asset disposed of is the amount by which the proceeds exceed the base cost of that asset.

What is base cost?

The base cost of an asset is what you paid for it, plus the expenditure. The following can be included in calculating the base cost:

  1. The costs of acquiring the property, including the purchase price, transfer costs, transfer duty and professional fees e.g. attorney’s fees and fees paid to a surveyor and auctioneer.
  2. The cost of improvements, alterations and renovations which can be proved by invoices and/or receipts.
  3. The cost of disposing of the property, e.g. advertising costs, cost of obtaining a valuation for capital gains purposes, and estate agents’; commission.

How was base cost of assets held calculated before 1 October 2001?

If the property was acquired before 1 October 2001 you may use one of the following methods to value the property:

  1. 20% x (proceeds less expenditure incurred on or after 1 October 2001)
  2. The market value of the asset as at 1 October 2001, which valuation must have been obtained before 30 September 2004.
  3. Time-apportionment base cost method. Original cost (proceeds – original cost) x number of years held before 1 October 2001 divided by the number of years held before 1 October 2001 number of years held after 1 October 2001).

How is Capital Gains Tax paid?

Capital Gains Tax is not a separate tax from income tax. Part of a person’s capital gain is included in his taxable income. It is then subject to normal tax. A portion of the total of the taxpayer’s capital gain less capital losses for the year is included in the taxpayer’s taxable income and taxed in terms of normal tax tables.

How is Capital Gain calculated?

If you are an individual, the first R30 000 of your total capital gain will be disregarded. Then 33.3% of the capital gain made on disposal of the property must be included in the taxable income for the year of assessment in which the property is sold. When the property is owned by a company, a close corporation or an ordinary trust, 66.6% of the capital gain must be included in their taxable income.

Primary residence and Capital Gains Tax

As from 1 March 2012 the first R2 million of any capital gain on the sale of a primary residence is exempted from Capital Gains Tax. This exemption only applies where the property is registered in the name of an individual or in the name of a special trust. The property should furthermore not exceed 2 hectares. If the property is used partially for residential and partially for business purposes, an apportionment must be done.

If more than one person holds an interest in a primary residence, the exclusion will be in proportion to the interest held by each party. For example, if you and your spouse have an equal interest in the primary residence, you will each qualify for a primary residence exclusion of R1 million. You will also be entitled to the annual exclusion, currently R30 000.

This newsletter is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).