Lots of our SAPIN clients often ask us about CGT and what is the best statutory vehicle for operating your property investment portfolio to use. Often our answer to this is “it depends”. While taxes are not the only determinant for which vehicle to use, it is important for you to understand the tax rate of each vehicle during your planning phase in order to avoid undue costs and inefficient tax rates.
- Lowest inclusion rate for CGT.
- CGT is levied at an effective rate of 0 – 18% depending on the individual’s tax bracket.
- First R2 million of profit is exempt from CGT if it is a primary residence.
- Naturals persons qualify for R40 000 CGT exemption per annum. (Not carried over.)
- No auditors or accounting officer’s fees.
- R2 million exemption does not apply to non-residents.
- R2 million exemption does not apply to second or further properties.
- Estate duties and executors fees will be payable on death.
OWNING IN AN ENTITY (PTY OR CC)
- At the time of acquisition of the immovable property, the agreement of sale can be signed on behalf of a company “to be formed” and the contract ratified by the company after its formation.
- In the past a company was prohibited from providing financial assistance to a purchaser for the purpose of or in connection with the acquisition of shares in that company. Accordingly, a bond could not be registered over the company’s property to finance the acquisition of shares. With effect from December 2007, such financial assistance is possible however in limited instances only. This may assist with the acquisition of property given the stringent lending requirements of banks.
- A company still remains the cheapest way to retain profits inside your structure for reinvestment.
- In actively trading entities with sufficient disposable income and non-executive shareholders, the directors are rarely asked to sign personal sureties when leveraging property.
- Trading entities with non-executive shareholder, the directors are rarely asked to sign personal sureties when leveraging property.
- Higher inclusion rate for CGT than applies to individuals.
- CGT is levied at an effective rate of 22.4% on the profits earned.
- No CGT exemption applies.
- Annual financial statements must be submitted.
- Where the property being sold is the only asset/greater of assets of the company, a special resolution must be filed with the Registrar of Companies within one month of the sale. Failure to do so renders the transaction voidable. In order for the shareholder to access the profit made by the company or close corporation, the company will have to declare a dividend which will attract dividends tax.
- If you are the shareholder or member, then the net value of the shares or membership interest will form part of your estate when determining any liability for estate duty tax.
- Shares in the company or the membership in a close corporation are assets in an estate and can be attached by creditors in the event of sequestration.
PURCHASING A TRUST
- An effective estate planning tool because a trust cannot die and the assets held in a trust are then not subject to estate duty.
- Assets are protected from attachment for personal liabilities.
- Eliminates the complications arising when there are multiple heirs in your estate since the trust remains the owner even after your death.
- The trust is a separate legal entity and the trust assets cannot be attached by the creditors of the beneficiaries.
- The trust does not need to be audited and is, therefore, a more cost-effective option than a company.
- The conduit principle allows profit to flow out and be taxed in the hands of the beneficiary at a lower tax rate.
- Highest effective rate for CGT if profits on the sale of the property are taxed in the hands of the Trust: 80% of the gains are included in the trust’s taxable income and taxed at 45% thereby giving an effective rate of 36%.
- Income tax is levied at a flat rate of 45% which is more than you would pay as an individual or if the property was held in another entity.
- Unlike companies and close corporations, the trust must be in existence at the date of signature of the agreement to purchase.