Taxing transfers
For most of us the purchase of a house is likely to be our most expensive ever purchase. But the listed price you see on a sales brochure or website does not tell the full story of how much you will need to pay up when buying a house in South Africa. In addition to a deposit towards the purchase price, there are also transfer costs (and bond registration costs if the purchase is being funded by a mortgage bond). The transfer costs consist of transfer fees (the legal fees paid to the conveyancing attorney handling the transfer from the seller) and – for properties valued at over R1m – a potentially hefty amount of tax called “transfer duty”.
Property taxes: an historical perspective
Property tax is likely the oldest basis of taxation in history and even predates coinage: Egypt is thought to have first levied direct taxes on property in around 3000 BC and used the taxes to build grain warehouses and pay for building the pyramids. Because there was no coined money at that time, the taxes were collected in the form of harvest yields, other property, or labour.
Transfer duty is one of the oldest taxes levied in present-day South Africa and derived from the Dutch model. It was introduced in the Cape of Good Hope in 1686 and was originally referred to as the “40th penny” – because of a 2.5% tax rate at the time.
Taxes on the acquisition (or other alienation) of immovable property (i.e. property transfer taxes) are commonly found in countries across the world. In traditionally Common Law countries (i.e. those with
Property tax is likely the oldest basis of taxation in history and even predates coinage: Egypt is thought to have first levied direct taxes on property in around 3000 BC and used the taxes to build grain warehouses and pay for building the pyramids. Because there was no coined money at that time, the taxes were collected in the form of harvest yields, other property, or labour.
Transfer duty is one of the oldest taxes levied in present-day South Africa and derived from the Dutch model. It was introduced in the Cape of Good Hope in 1686 and was originally referred to as the “40th penny” – because of a 2.5% tax rate at the time.
Taxes on the acquisition (or other alienation) of immovable property (i.e. property transfer taxes) are commonly found in countries across the world. In traditionally Common Law countries (i.e. those with
a largely British heritage), such as the United Kingdom, USA, Canada, Australia and New Zealand, these taxes tend to be levied as a stamp duty on the deed of sale – usually at rates below 2%. In Civil Law countries (i.e. countries with a European continental heritage), such as the Netherlands, Belgium, France and Portugal (and their colonies), these taxes are more akin to South Africa’s transfer duty and are usually levied at relatively high rates (in many in-stances exceeding 6%)
How much is Transfer Duty?
Our current Transfer Duty Act became law on 1 January 1950. The Act replaced diverse provincial laws relating to transfer duty which applied at the time. The rate levied works on a sliding scale and is amended from time to time. Currently Transfer Duty is levied on transfers where the value of a property exceeds R1m; the rate starts at 3% on the value exceeding R1m and increases to 13% on amounts exceeding R11m.
How much is Transfer Duty?
Our current Transfer Duty Act became law on 1 January 1950. The Act replaced diverse provincial laws relating to transfer duty which applied at the time. The rate levied works on a sliding scale and is amended from time to time. Currently Transfer Duty is levied on transfers where the value of a property exceeds R1m; the rate starts at 3% on the value exceeding R1m and increases to 13% on amounts exceeding R11m.
When is Transfer Duty levied?
Transfer Duty is a tax levied on the value of any property which is acquired by way of a transaction or otherwise. Most cases involve the acquisition of immovable property by way of an agreement of sale. But it also applies to other forms of transaction such as donations and exchanges. Transfer duty is also paid if there is a renunciation of rights to property: for example, if a right of way servitude or a usufruct over a property is cancelled in favour of the owner of the property, transfer duty is payable by the owner on the amount of the enhanced value of that property as a result of the removal of the restriction.
What constitutes “property” for the purpose of Transfer Duty?
Property includes:
• Land and buildings;
• Real rights in land, such as a usufruct and servitude (but not leases and rights in terms of mortgage bonds);
• Rights to minerals or rights to mine for minerals;
• A share or interest in a “residential property company” i.e. a company or close corporation whose assets consist primarily of residential property;
• A contingent right to residential proper-
Transfer Duty is a tax levied on the value of any property which is acquired by way of a transaction or otherwise. Most cases involve the acquisition of immovable property by way of an agreement of sale. But it also applies to other forms of transaction such as donations and exchanges. Transfer duty is also paid if there is a renunciation of rights to property: for example, if a right of way servitude or a usufruct over a property is cancelled in favour of the owner of the property, transfer duty is payable by the owner on the amount of the enhanced value of that property as a result of the removal of the restriction.
What constitutes “property” for the purpose of Transfer Duty?
Property includes:
• Land and buildings;
• Real rights in land, such as a usufruct and servitude (but not leases and rights in terms of mortgage bonds);
• Rights to minerals or rights to mine for minerals;
• A share or interest in a “residential property company” i.e. a company or close corporation whose assets consist primarily of residential property;
• A contingent right to residential proper-
ty held by a discretionary trust (not a special trust), where the acquisition of the right is in consequence of an agreement for consideration in relation to property held by that trust; or accompanied by a change in the debt or security structure of the trust; or accompanied by a change in the trust’s trustees (i.e. where someone acquires rights to a property by “buying” and restructuring the trust which owns the property) and
• A share in a share block company.
When and by whom is Transfer Duty payable?
Transfer Duty is payable by the person acquiring the property, within six months of the date of acquisition.
On what base amount is Transfer Duty levied?
Transfer duty is payable on the highest of the following values in respect of the acquisition of “property”:
• the amount of the consideration (price) payable (where consideration is payable – such as in a sale); or
• the “declared value” (where no consideration is payable – such as a donation or exchange); or
• the “fair value”.
“Fair value” means the fair market value of that property as at the date of acquisition. In an arm’s length transaction between two unrelated parties, the consideration payable by the purchaser will generally be representative of the fair market value on which transfer duty is paid. However, in the case of related parties the sale price could likely
• A share in a share block company.
When and by whom is Transfer Duty payable?
Transfer Duty is payable by the person acquiring the property, within six months of the date of acquisition.
On what base amount is Transfer Duty levied?
Transfer duty is payable on the highest of the following values in respect of the acquisition of “property”:
• the amount of the consideration (price) payable (where consideration is payable – such as in a sale); or
• the “declared value” (where no consideration is payable – such as a donation or exchange); or
• the “fair value”.
“Fair value” means the fair market value of that property as at the date of acquisition. In an arm’s length transaction between two unrelated parties, the consideration payable by the purchaser will generally be representative of the fair market value on which transfer duty is paid. However, in the case of related parties the sale price could likely
be less than the property’s value (e.g. a “friendly” sale by a parent to a child). In transactions between connected (related) parties, SARS insists on estate agent’s valuations being submitted with the transfer duty return.
The principle is that transfer duty is calculated on the value of the property not the price.
Are any property transactions exempt from Transfer Duty?
The good news is that not every transfer attracts Transfer Duty. The following are some of the transfers which are exempt from duty:
• acquisitions by Government, municipalities and public benefit organisations
• inheritance of fixed property by heirs or legatees
• acquisition of property in the case of divorce, regardless of the marriage regime (including civil unions or same-sex partnerships)
• rectification of registration errors (where property is being transferred to rectify errors made in a previous transfer)
• transfers of trust property by trustees
The principle is that transfer duty is calculated on the value of the property not the price.
Are any property transactions exempt from Transfer Duty?
The good news is that not every transfer attracts Transfer Duty. The following are some of the transfers which are exempt from duty:
• acquisitions by Government, municipalities and public benefit organisations
• inheritance of fixed property by heirs or legatees
• acquisition of property in the case of divorce, regardless of the marriage regime (including civil unions or same-sex partnerships)
• rectification of registration errors (where property is being transferred to rectify errors made in a previous transfer)
• transfers of trust property by trustees
of a trust to a trust beneficiary (where the beneficiary is related to the founder of the trust)
• where VAT is levied on the sale (e.g. the sale of a property by a VAT vendor in the course of their business – the purpose of this exemption is to ensure that a transaction is not subject to both VAT and transfer duty)
What happens if a party is behind with their taxes?
SARS uses property transfers in an effort to ensure that, where applicable, the parties concerned are on register for the various taxes and that their tax returns and tax payments are up to date. The transacting taxpayers will therefore be informed, through this process, of any non-compliance regarding their own tax affairs, and will be given the opportunity to rectify matters. As part of the recovery process, a conveyancer may be appointed as a with-holding agent to pay SARS from the proceeds of the sale – usually within five days of the receipt of funds relating to the transaction.
By its very nature the purchase of a property is complex and costly and buyers are advised to seek appropriate financial and legal advice before concluding the deal.
• where VAT is levied on the sale (e.g. the sale of a property by a VAT vendor in the course of their business – the purpose of this exemption is to ensure that a transaction is not subject to both VAT and transfer duty)
What happens if a party is behind with their taxes?
SARS uses property transfers in an effort to ensure that, where applicable, the parties concerned are on register for the various taxes and that their tax returns and tax payments are up to date. The transacting taxpayers will therefore be informed, through this process, of any non-compliance regarding their own tax affairs, and will be given the opportunity to rectify matters. As part of the recovery process, a conveyancer may be appointed as a with-holding agent to pay SARS from the proceeds of the sale – usually within five days of the receipt of funds relating to the transaction.
By its very nature the purchase of a property is complex and costly and buyers are advised to seek appropriate financial and legal advice before concluding the deal.