1. ALAN WEST'S ARTICLE IN SOUTH AFRICAN DEEDS JOURNAL NOVEMBER 2008
1.1 I refer to Alan West's Article, What is fractional ownership? in the South African Deeds Journal November 2008 dealing with the manner in which the so-called "fractional ownership schemes" are being conducted presently.
1.2 Whilst I agree with Alan West I think the following may be of relevance regarding the schemes conducted in the manner set out in the said article:
1.2.1 the marketing of the shares in the way that it is presently being done seems to be in contravention of the provisions of the Companies Act 61 of 1973, the Share Blocks Control Act, 1980 and the Property Time-Sharing Control Act, 1983 and;
1.2.2 the fractional ownership schemes are, I submit, operating in contravention of the Share Blocks Control Act, 1980, the Property Time-Sharing Control Act, 1983 and, in some instances, the Subdivision of Agricultural Land, 1970 and;
1.2.3 If the company owning the underlying property is an ordinary private company (and not a Share Block company which I suggest it should be) the 'investor' may, when he wishes to sell his shares discover that the right to do so is restricted in terms of the provisions of the Companies Act and;
1.2.4 In view of the nature of the schemes the value of the supplies made by a developer to the purchasers of the so-called 'fractional ownerships" will in all probability exceed the registration threshold provided for in the Value-Added Tax Act 89 of 1991 (R300 000,00 to be increased to R1 000 000,00) and will accordingly attract VAT and not transfer duty.
2. APPLICABLE LEGISLATION
2.1 In terms of section 141 of the Companies Act 61 of 1973 "No person shall either orally or in writing (including any newspaper advertisement or any advertisement in electronic format) make an offer of shares for sale to the public or issue, distribute or publish any such material which in its form and context is calculated to be understood as an offer as aforesaid unless it is accompanied by a written statement containing the particulars required by this section to be included therein".
(It needs to be noted that section 11 of the Share Blocks Control Act 59 of 1980 provides an alternative procedure to those contained in the Companies Act for offering shares to members of the public. The developer may dispense with the usual procedures if his offer is accompanied by a statement that a prospective purchaser will be required to enter into a contract referred to in section 17 of the Share Blocks Control Act in respect of the shares and that a copy of the draft contract is available for inspection free of charge at an address indicated in the statement)
2.2.1 a 'share block scheme' means "any scheme in terms of which a share, in any manner whatsoever, confers a right to or an interest in the use of immovable property" in terms of the definition thereof in the Share Blocks Control Act,1980 and;
2.2.2 The Share Blocks Control Act,1980, in section 4 thereof provides that "For the purposes of this Act a company shall be presumed to operate a share block scheme if any share of the company confers a right to or an interest in the use of immovable property or any part of immovable property."
The manner in which the scheme is advertised and the sale agreements of the shares should thus comply with the provisions of that act and the expression 'share block' or 'aandeleblok' should be included in or form part of the name of the company owning the underlying immovable property.
2.3 The arrangements referred to in Allan West's article fall under the definition of a 'property time-sharing scheme' as contained in the Property Time-Sharing Control Act 75 of 1983 which reads as follows-
(a) any scheme, arrangement or undertaking in terms of which time-sharing interests are offered for alienation or are alienated and the utilization of such interests is regulated and controlled, whether such scheme, arrangement or undertaking is operated pursuant to a share block scheme, any scheme under which time-sharing interests connected with rights to membership of or participation in any club are granted, any time-sharing development scheme based on the alienation of undivided shares in a unit as defined in section 1 of the Sectional Titles Act, 1971 (Act 66 of 1971), or otherwise; or
(b) any scheme, arrangement or undertaking declared a property time-sharing scheme by the Minister by notice in the Gazette for the purposes of this Act, in terms of which interests in the use or occupation of immovable property, or any portion or part thereof, defined in the notice, are sold or lease;
The manner in which the scheme is advertised and the sale agreements of the shares should thus comply with the provisions of that act.
2.4 Many of the newspaper advertisements and sale agreements which I have seen do not comply with the requirements of the Companies Act 61 of 1973 nor the Share Blocks Control Act, 1980 nor the Property Time-Sharing Control Act, 1983.
2.5 A private company is defined by section 20(1) of the Companies Act as a company having a share capital which by its articles: (a) restricts the right to transfer its shares; (b) limits the number of its members to fifty; and (c) prohibits any offer to the public for the subscription of any shares of the company. If the company owning the underlying property is an ordinary private company (and not a Share Block company which I suggest it should be) the 'investor' may, when he wishes to sell his shares discover that the right to do so is restricted in terms of the said provision of the Companies Act.
2.6 If the underlying property is 'agricultural land', as defined in the Subdivision of Agricultural Land, 1970 (where the fractional ownership relates to, for instance, a game farm) the following provision contained in section 5(1)(a) of the Share Blocks Control Act, 1980 is relevant:
(1) No share block scheme shall be operated in respect of-
(a) agricultural land as defined in section 1 of the Subdivision of Agricultural Land Act, 1970 (Act 70 of 1970), unless consent for the sale or the granting of a right to a portion of such agricultural land has previously been obtained in writing from the Minister of Agriculture by either the owner or the prospective buyer of such agricultural land
3. TRANSFER DUTY OR VAT
3.1 I wish to refer to the following extracts from the document issued by the Legal and Policy Division of the South African Revenue Service ("SARS") on 9 December 2008 titled: VAT 409 - Guide for Fixed Property and Construction:
Fractional ownership has been advertised and promoted as a new concept of ownership and investment and refers to the collective ownership of an asset. The asset concerned could be anything from an aircraft to a yacht, but typically the underlying asset is a luxury home, holiday apartment, or hotel suite of high monetary value (often with managed hospitality and support services) which is used by the fractional owners for leisure purposes. The costs of administering the scheme are divided among the fractional owners in accordance with their shareholding in the entity (normally a company) which owns the asset.
Through the use of an ownership usage roster, the fractional owners are each allocated a number of days or weeks during the year within which they may enjoy the exclusive use of the property's amenities, and the related common areas of the applicable resort, or other property of similar size and type. Some fractional projects also participate in exchange programmes, which allow purchasers access to other properties located abroad which are of comparable quality and value.
In short, the purchase of a fractional interest normally involves the sale of shares in a company which goes hand-in-hand with a use agreement which regulates how the underlying property or any part thereof is to be used by the fractional owners.
The issue which normally arises in this regard is whether the supply of a fractional ownership interest in a company (which has as its underlying asset a fixed property) constitutes -
· the sale of an "equity security" (share) - which is exempt from VAT and therefore treated the same as the normal purchase of shares in a juristic person; or
· the supply of shares in a share block company or the supply of a time-sharing interest - both of which constitute the supply of "fixed property" and "goods" and are subject to VAT at the standard rate of 14% if the supplier is registered for VAT (or required to be registered); or
· a supply which is subject to transfer duty.
Some members of the legal fraternity have expressed the view that certain fractional ownership schemes may (depending on the type of scheme) be operating in contravention of either the Share Blocks Control Act, 1980 or the Property Time-Sharing Control Act, 1983. Further, that any supply of fractional interests in relation to the use of fixed property owned by the company in which the shares are held, constitutes the supply of "fixed property" because of the occupation rights which it confers on the owners, and accordingly, the supply thereof will fall into the VAT net.
Estate agents and developers who promote these schemes appear mainly to be of the view that the supply of the fractional interests constitutes the supply of shares (equity securities) which are exempt from VAT. This seems to be based on the view that fractional ownership schemes do not fall within the ambit of either the Share Blocks Control Act or the Property Time-Sharing Control Act.
From a VAT perspective, the determining factor of the taxable nature or otherwise of the supply of these fractional interests is based on whether the supply of the rights and interests under the fractional ownership scheme constitutes the supply of "fixed property" and "goods" as defined in section 1 of the VAT Act (regardless of whether the fractional ownership scheme itself complies with the provisions of the Share Blocks Control Act or the Property Time-Sharing Control Act). The characteristics of the fractional ownership schemes described above which involve the underlying use of fixed property are very similar to share block and time-sharing schemes. This is because included in the supply is a right to, or an interest in, the use of immovable property or a part thereof.
SARS' view is therefore that the supply of fractional ownership interests in a scheme where the objective is for the shareholders to acquire the use of fixed property does not merely constitute the supply of equity shares, but rather, interests in share block or time-sharing schemes which confer a right of use or occupation upon the owners.
Since the supply of such rights and interests constitutes "fixed property" and "goods" as defined in section 1 of the VAT Act, it follows that a property developer, a property agent or any other vendor supplying fractional ownership interests in fixed property is liable to levy and collect the VAT from the purchaser where the value of the supplies made by that person exceeds the registration threshold.
These supplies are, therefore, subject to VAT at the standard rate of 14% when supplied by a person who is, or who should be, registered as a VAT vendor. Failure to charge VAT will result in the price charged for the supply being deemed to include VAT at 14%.
Where fractional ownership interests in fixed property are supplied by persons who are not liable to register for VAT, the supply is subject to transfer duty."