Buying a House in South Africa
Numerous property buyers have asked me the question ‘In which entity should I buy a house/flat or holiday home?’ Each person’s circumstances differ, and it is not a straight forward answer. What is preferable from a legal perspective may not necessarily yield the best result from a tax perspective.
If the property in question is a person’s primary residence, then it’s nearly always better to buy the property in a person’s own name. The reason is that the primary capital gains tax exclusion is R1.5 million. This is only applicable to individuals and for South African tax residents. (Remember a non-resident becomes a SA tax resident as soon as his intention is to make South Africa his primary home or if he spends a certain amount of time in SA). For non-residents, my advice is usually if a couple is buying to put it in both of their names, especially if they do not earn any South African sourced income. The benefit is here that both will have the advantage of the annual capital gains tax exclusion of R17 500 and not be taxed for income tax purposes on the first R57 000. Example: If a couple with no other South African income is making a R491 000 Capital gain, they will not have to pay tax at all. Each receives a capital gain of R245 500 (50%), the first R17 500 is exempt and only 25% of the balance (R228 000) is taxable. 25% of R228 000 is R57 000, and fortunately the income tax exemption is R57 000. The exemption (R88 527) is more for people aged 65 years and older.
If a person is buying a second property, then it might be the best to buy it in a trust, especially if the purpose is to buy it with a long-term objective. This could have various benefits, for example security against creditors, spreading the rental income and capital gains to various beneficiaries, pegging the value for estate duty purposes, etc.
Non-residents buying property in South Africa should remember that it is advisable to have a separate will in South Africa for their South African assets.
Property buyers should preferably not buy a house or a flat in a company, except if they want to do property development. Numerous people have made the wrong choice to buy their house by buying the shares in a company or close corporation that owns a house. The administrative costs each year could be substantial. If you did bought your house in such an entity, then I would advise you to try and sell your shares rather than the entity selling the house. This way, you could save a substantial amount in capital gains tax (the capital gains tax rate for companies is higher than for individuals).
It is important that taxpayers contemplating property transactions obtain proper tax advice to ensure that their obligations are met and their overall tax burden is minimised.
When deciding on the best way to purchase property, you should first look at your objective regarding the property. You need to ask yourself the following questions:
- What do I intend to do with the property? Am I buying it for a short-term period or will I hold on to the property for an indefinite period of time?
- Am I going to renovate the property and sell it, to make a profit? If you do this on a regular basis, then you will be classified as a property developer and you will pay income tax of 40% on the profits and not the capital gains tax at 10% (tax rates will be dependent on your income tax rate with the maximum payable).
- Am I buying the property for rental purposes?
- Am I buying the property to give it to my children one day?
Is estate duty a concern of mine?
- Am I concerned about asset protection?
- Will the property be my primary residence?
As far as residential property is concerned, there are two ways in which to purchase the property: in your personal name or in a Trust. Let us compare the two.
The transfer duty is low – up to R500 000 the transfer duty is Rnil. From R500 000 to R1million it is 5%, and if the purchase price is more than R1 million then the transfer duty is 8%.
If it is your primary residence you will not pay capital gains tax on the first R1.5 million of growth in the property. If you purchase a property for R2 million and you later sell it for R4.5 million you would have made R2.5 million profit. You will not pay capital gains tax on the first R1.5 million of the profit, so you will pay CGT on R1 million.
As the property is in your own name, it can be attached by creditors. It forms part of your personal estate and you will have to pay deathbed expenses. Let’s use the same example and assume you die when the property is worth R4.5 million.
Estate duty will be payable at a rate of 20% or R900.000 (if you have other assets of R3.5 million). The problem only increases as the property grows in value. If the above property were a second property, you would have to pay capital gains tax of 10% assuming your marginal rate was 40%. Your estate would have to pay 10% CGT based on the R2.5 million growth or R250 000.
Even if the property is your primary residence, you will have to pay CGT on R1 million (R100 000). You will have executor’s fees to pay of 3.99% on R4.5 million (R179 550). Your estate will be frozen and takes a long time to wind up an estate. If your beneficiaries inherit the property in their own name, it will form part of their own estate and they will have the same disadvantages.
When you add up all the deathbed expenses, you will pay R1 179 550 or 26.2% of the value of the property in the case of a primary residence. If it is a second property, it will cost R1 329 550 in deathbed expenses or 29.5%
- The property will be protected from your creditors
- It will not form part of your personal estate so you will not pay the certain deathbed expenses, i.e. Estate duty of 20% and Executor’s fees of 3.99% (advice is here to name your spouse or child as executor. Your spouse or child could then negotiate executor fees of at least 2% with an accountant or attorney)
- No capital gains tax will be payable on your death if your beneficiaries do not sell the property i.e. if it is a holiday home or an investment property. This does not mean capital gains tax will never be payable, it just means it won’t be payable on your death, but only when the property is sold. When the property is sold, the money will be available to pay capital gains tax. Your beneficiaries will not be forced to sell the property to pay capital gains tax.
- There will be no freezing of the property, as it does not form part of your estate. If you were to sell the property you would have immediate access to the proceeds of the sale.
- As the property is owned by the Trust it will not form part of the beneficiaries’ personal estates and no further estate duty will be payable unless the beneficiaries deliberately take the asset out of the Trust and place it under their personal name.
- Transfer duty is at a flat rate of 8%, which is higher than if the property is purchased in your own personal name.
- If the Trustees decide to sell the property and keep the money in the Trust, the Trust will pay 20% capital gains tax, which is higher than the 10% you pay in your personal name.
Important: The Trustees can pass the proceeds of the sale out of the Trust to the beneficiaries of the Trust and the beneficiaries will pay capital gains tax in their own name. This means you will never pay more capital gains tax in a Trust than in your own name if it were a second property!
Example: If the property is your primary residence and it is owned by a Trust, you will pay between R150 000 and R400 000 more than if it is in your own name. However, you need to compare this to R1 179 550 or R1 329 550 in total deathbed expenses. You then need to decide which option is most appropriate for you.
Non Resident Capital Gains
If you are resident in South Africa, a capital gain is the profit you make when you dispose of an asset after 1 October 2001. If you are a non-resident you will only make a capital gain on the disposal of immovable property situated in South Africa, or on any asset attributable to a permanent establishment that you may own in South Africa.
You will only pay tax on a portion of the profit that you make from the sale. This means that you can deduct the cost of the asset (the base cost) from the proceeds of the disposal, as well as the agent’s commission on selling. If you acquired the asset before 1 October 2001, you must only include the profit that accrued after that date in your taxable income in the year in which you dispose of the asset.
The main costs that form part of the base cost of an asset are:
- The price you originally paid to buy it or create it
- The cost of valuating it
- The costs directly related to the acquisition or disposal of that asset, namely remuneration of a surveyor, valuer, auctioneer, accountant, or legal advisor, for services rendered
- Transfer costs
- Stamp duty, transfer duty, or similar duty
- Advertising costs to find a seller or to find a buyer.
There is an annual capital gains tax exemption of R16 000 and 25% of the balance after deducting this from your profit will be added to your other South African income and taxed accordingly. Due to the annual tax threshold of R46 000, no tax will be payable on the first R200 000 of your capital gain if you have no other South African income. The maximum that you could pay in taxes on your capital gains in South Africa is 10% of your capital gain. That is because the maximum tax rate is 40% and only 25% of capital gains is taxable. You will pay less than 10% if your other South African income is less than R490 000.
There is also a primary residence exclusion of R1.5 million. This is however only available if the property is deemed to be your primary residence. It is clear from the definition that if a company, close corporation or ordinary trust owns a residence, it will not qualify as a primary residence, even if it is occupied as his residence by a shareholder of the company, member of the close corporation or beneficiary of the trust.
When a person disposes of a primary residence together with the land on which it is situated, the exclusion of the capital gain or capital loss will apply only to so much of the land, including unconsolidated adjacent land as long as the land:
- Does not exceed two hectares;
- Is used mainly for domestic or private purposes together with the residence; and
- Is disposed of at the same time and to the same person as the residence.
An adjustment must be made when a person has occupied a residence as his primary residence for only a part of the period during which it was held after 1 October 2001. The capital gain or capital loss to be disregarded in these circumstances must be determined with reference to the period on or after 1 October 2001 during which the person concerned was ordinarily resident in the residence.
There is an exception to this rule when a residence remains unoccupied in special circumstances. A natural person or a beneficiary of a special trust must be treated as having been ordinarily resident in a residence for a continuous period of up to two years if he/she does not reside in it during this period for any of the following reasons:
- The residence was offered for sale while it was primary residence and it was vacated due to the acquisition or intended acquisition of a new primary residence.
- The residence was being erected on land acquired in order to be used as his primary residence.
- The residence was accidentally rendered uninhabitable.
- The natural person or beneficiary died.
Capital gains tax is payable on or before 30 September of the next tax year. A South African tax tear is from 1 March to the end of February. If you therefore sell your property on 15 March 2008 and have to pay capital gains tax, then you should do it on or before 30 September 2009. Please take note that you will not be able to sell fixed property if you are not tax registered in South Africa.
When Do You Need To Register As a Taxpayer in South Africa?
Persons who are not “residents” as defined are subject to South African normal tax on their income that is derived from a source within or deemed to be within South Africa. Someone that went to the UK to work there will most probably after a year fall in this category (you will be still a South African resident, but not anymore a “tax resident” in South Africa.)
People are often unsure if they need to register for tax in South Africa, while abroad. Anyone who receives an income tax return must complete and return it irrespective of the amount of income of the person. If they did not received taxable income in South Africa, then they need to submit a R nil return. A person will need to register if he/she is going to sell a fixed property in South Africa. The sale will not take place if the seller is not tax registered in South Africa.
People that need to register for tax purposes in South Africa are people who:
- Receive income from a business in South Africa (irrespective of what the taxable income or assessed loss is.)
- Receive rental income in South Africa that is more than R12 000 per year.
- Receive capital gains in South Africa.
- Receive interest that is more than R18 000 if the person is younger than 65 years or R26 000 if the person is 65 years and older (Please take note that interest received by or accrued to a person who is not a resident is exempt from normal tax in terms of s 10(1)(h) of the South African Income Tax Act. The exemption is unavailable to a natural person if he was physically present in South for more than 183 days in aggegrate during the year of assessment in which the interest was received or accrued. The exemption is also unavailable to a person who at any time during the year of assessment carried on business in South Africa through a permanent establishment.)
- Receive income, other than remuneration.
One needs to register as a provisional taxpayer if your income is going to be more than the tax threshold (R43 000 for individuals younger than 65 years and R69 000 if you are 65 years and older.) Provisional tax is collected on a six-monthly basis. People often forget or are not aware that they need to register as provisional taxpayers if they receive income that is more than the tax threshold or on returning to SA and starting their own practice. Interest, penalties and additional taxes become payable, where:
- estimates of taxable income or payments of provisional tax are incorrect; or
- estimates of taxable income or payments of provisional are not made by the last day of the period prescribed for payment.
Anyone who receives a provisional return needs to complete it and return it to the South African Revenue Services, even if you have received no income in South Africa! If you do not, then you will not be able to sell your fixed property in SA in the future or get a tax clearance (to take out some money).
If a South African is for 184 days in any 365 day period out of South Africa (and that includes one continuous period of 61 days) then he will not be liable for tax on the foreign income earned in this period. Please take note that if you are, since 1 February, working in London, that you do not submit your 2007 tax return before you have passed the 184 day and 61day test. If you do, then you will be taxed in South Africa on February’s UK income! Please take note that it is also not necessary in the 2007 tax return to inform SARS regarding your foreign income, if it is not taxable in SA.
Are Flight Tickets Tax Deductible?
More and more South Africans are living abroad and have property in South Africa. Many of these people decide to invest in property in South Africa and to have a holiday home in South Africa or start to buy a flat or more in South Africa as future pension income.
I have had numerous queries from expatriates that ask me if they could deduct their travel costs to South Africa. The answer is “yes”, it is tax deductible if the travel cost is in the production of income. If you for example fly to SA to check on repairs, then it is a tax deductible expense. What normally happens is that you combine it with a holiday in South Africa. The South African Revenue Services could therefore assess that only 50% of the ticket was in the production of income.
If you fly to South Africa to come and have a look at a few properties to buy, then your expense will be of a capital nature (and will decrease your capital gains tax liability on selling the property). The same applies if you have a flat and your previous tenant has left and you are now doing repairs to the property before you rent it out again, or if you have just bought it and do repairs before you start to rent it out. The Receiver will deem the repairs as of a capital nature and also your travel costs. The reason for this is because the expense was to get the flat ready to rent it out (an expense in creating an income producing asset). It might be a good idea if you do come to South Africa to view more properties to buy, to keep the brochures of properties that were given to you by estate agents, and to keep their names. Keep also any projections that were made to you regarding the feasibility of the project, how much the rental income in that area is and how much the rates, insurance, repairs, etc. will cost you. This will be of assistance if there are any queries from the Receiver.
These capital costs will be deductible in calculating your capital gain on selling the property. Also any travel cost to South Africa to sell the property is of a capital nature and will decrease your capital gains tax liability.
Remember that you have to register in South Africa as a provisional taxpayer if your South African rental income is per year more than R12 000.
The 2007 income tax returns have been issued and must be submitted on or before 31 October 2007.
Is It Worth Dissolving a CC And Buying Property In Your Own Name?
As a Tax Consultant I am often asked “Is it worth dissolving a company (a property that is registered in a company) and buying the property in one’s own name?”
To enable one to answer this question one need to take the following factors into account:
- How long does the client intend keeping the property? It is not advisable to do the transfer if the intention is to keep the property for less than 2 years. The cost of transfer outweighs the tax benefit of paying less capital gains tax and less accounting fees.
- What is the market value of the property? If a R700 000 property is transferred to an individual, the transfer fee is about R18 644. If the property is transferred into a trust or a company, the transfer fee will be about R64 664.
- What are the accounting fees per annum of the entity? If you are paying R5 000 per year for financials and submitting of tax returns, then one should compare these costs to the transfer fees. If a property is kept for 10 years or longer in the entity’s name, you will pay a minimum R50 000 in accounting fees. You should compare this cost with the tax saving and the legal transfer fees! If the R700 000 property is in a Close Corporation or in a company and you intend to hold the property for more than 5 years, it is advisable to transfer to an individual. The transfer cost will be much less than the 5 years accounting fees. If you are thinking of transferring to a trust, then the intention to hold should be a bit longer. You should also check the beneficiaries’ individual tax rates before making this decision!
- How much is your personal marginal tax rate? If you pay 40% on any additional income, you have to compare that with the Company’s tax rate of 28%. The only way to distribute it to the members is to declare a dividend. But this will trigger another tax called Secondary Taxation on Companies (STC) (which is currently in the process of being replaced by a dividend withholding tax), that is levied at 10% on any distributions made to members.
- Are you using the property as your primary residence? If you are it is much easier to answer this question because the tax saving could be much more if the property is in your own name. Transfer is however still not advisable if you are going to sell after a short period of time because transfer costs have to be paid on the property that you are transferring into your private name. If you transfer from a company or cc and into your private name you have to pay transfer duty again.
In making the decision one needs to also take into account estate duty. Each person’s circumstances are different and that is why property investors should discuss their personal scenario with a Tax Consultant.