Established Cape Law firm, Herold Gie Attorneys, who this year celebrate 120 years of legal expertise, recently held an informative property and tax seminar at the Cape Town Hotel School attended by a number of property professionals from across the city.
Presented by Di Seccombe, National Head of Tax Training at audit and advisory firm Mazars, the seminar delivered a broad analysis of the recent 2014/ 2015 Budget Speech, as well as recent legislative and administrative changes that impact the SA property industry and real estate agents in particular.
Seccombe said there had been no great surprises delivered in the latest Budget Speech, as Finance Minister Pravin Gordhan instead appeared to tread a fine line (as well as an ‘election tightrope’) between balancing South Africa’s social demands with the need to prove to ratings agencies such as Moody’s, Fitch and Standard & Poor’s, and thus to international investors, that there is a steady hand on the country’s financial tiller. He ultimately stuck fast to the government’s plan to reduce spending, grow the economy and cut its budget deficit.
From a real estate point of view, said Seccombe, the budget did not bring any specific tax relief for homebuyers or owners, either by way of a higher transfer duty threshold or by means of providing further tax deductions in respect of homeownership related expenses. Such relief may have helped to alleviate the current decline in housing affordability, particularly as house prices and interest rates rise, and salary increases fail to keep up with higher household costs. Interestingly, however, the income that government earns from transfer duties surged by 28% in the 2013/2014 tax year, which suggests that the housing market is on its’ way to a recovery following a five-year slump.
The Minister, stated Seccombe, was also not very specific about the government’s plans to achieve economic growth and specifically to support small business in any meaningful way, as this is always the best creator of jobs and, ultimately, housing demand. However, new spatial plans for cities, upgrading informal settlements, increased social infrastructure and improved public transport, coupled with the aims to deliver more than 200 000 new social housing units over the next 2 years, all represented positive news for both the economy and the property market, she stated.
Whilst Gordhan’s announcement of R9,3 billion worth of personal tax relief to cash-strapped consumers was met with much public gratification, Seccombe was quick to point out the facts in this regard. She noted that, with consumer incomes under increasing pressure from rising transport, food and utility costs, the household tax relief announcement would not (taking into account moderate salary increases) make a great difference to ‘take-home pay’ and disposable income. With tax brackets essentially being ‘widened’, this was also likely to result in individuals falling into the same tax bracket as the previous fiscal year, she commented.
However, welcome news to South Africa’s financial (and property) communities, said Seccombe, was that South Africa’s tax collection once again appears to have been exceptionally efficient, bringing in more than anticipated. For the first time since the recession, corporate revenues will exceed the 2008/2009 peak of R1,65 billion. Much of this, she said, can be attributed to the Tax Administration Act and third-party data verification legislation afforded by Government Gazettes 35090 and 36346, which have significantly improved SARS’s ability to monitor that taxpayers are making full disclosure of all income in their annual tax returns.
The above legislation has afforded SARS previously unprecedented power and access to information, and substantially increased ability to collect taxes owing. It has thus transformed banks, medical aid schemes and other third-parties into agents of SARS, in terms of verifying tax return information. This third party information includes, among other things, rental income, disposal and buying of shares, interest and dividend income, purchase of retirement funding, medical aid contributions and insurance pay outs on death. In this respect, it is important to note that any rental or managing agent, collecting monies on behalf of a landlord, is now legally required to submit all information in this regard directly to SARS in order to assist with data verification.
With increased rental demand stimulating growth in the ‘buy-to-let’ market, Seccombe warned that expenses claimed for repairs and maintenance, will be scrutinized by SARS. Expenses incurred in respect of repairs have to relate to trade assets that are damaged or have deteriorated. Expenses incurred replacing assets that are serviceable for purely aesthetic reasons will not qualify for a tax deduction. The cost of improvements, reconstructions or additions to a property cannot be deducted as these expenses are of a capital nature. Neither will a deduction be allowed for repairs, if you repair a property which was previously let and which you now want to occupy or sell. You will need to make the repairs whilst your property is being let. Also worth noting, she said, is that there is a fine line of distinction between repairs and maintenance on the one hand, and improvement and reconstruction on the other. Each case is assessed on its’ own merits.
In the case of a commercial property transaction, stated Seccombe, it is also important to note that if the seller is a VAT vendor, and the sale is in the course and furtherance of the seller’s enterprise, VAT will ordinarily be payable at the rate of 14%. If, however, a commercial property is sold as a going concern, the transaction will be “zero-rated”, provided that:
- the seller and the purchaser are VAT vendors;
- the seller and the purchaser have agreed in writing that the property is sold as a going concern;
- the property has income-earning activity and the parties agree in writing that the property will constitute an income-earning activity on date of registration of transfer; namely that the rent producing tenants will be sold with the property;
- the sale of the property must include all the assets which are necessary for carrying on the income-earning activity;
- the seller and the purchaser agree in writing that the purchase price is inclusive of VAT at the rate of 0%.
Estate agents and conveyancers also have a duty to inform the purchaser that if a seller is a non-resident, that there may be a withholding tax responsibility for the purchaser when paying the non-resident the purchase price. The estate agents and conveyancers incur this obligation, if either or both are involved in the transaction and are being paid for performing this function. If they do not inform the purchaser as required, they can be held jointly and severally liable for payment of the tax, up to the amount of their respective fees from the deal. If no agent or conveyancer is involved, and the purchaser knows or should have known that the seller is not a resident, the purchaser then becomes personally liable for the tax that should have been withheld. The rate of withholding tax is dependent on the legal nature of the seller and will only apply to properties selling for more than R2 million. The withholding tax is an advance payment of the capital gains tax ultimately payable by the non-resident seller when they submit their tax return to SARS.
In a complex tax environment, with constantly changing legislation, and an efficient and effective South African Revenue Service, Herold Gie Attorney’s highly qualified and experienced Property and Tax attorneys are on hand to provide sound and up-to-date advice on all property related legal issues .