Confusion is rife about the payment of transfer duty on the acquisition of immovable property by a company, close corporation or a trust. For this purpose, the author wishes to address some questions regarding amendments brought about by Sections 2, 3 and 4 of the Revenue Laws Amendment Act, 2002, which pertain to transfer duty and the transfer of shares in companies, members' interests in close corporations or interests in trusts that hold "residential property" as presently defined in Section 1 of the Transfer Duty Act, 1949 ("the Act").
The Revenue Laws Amendment Act, 2002 was promulgated on 13 December 2002. Its provisions came into force on that day and apply in respect of acquisitions of any property on or after that date.
In terms of section 2 of the Act, transfer duty is levied on the value (which is either the consideration or "fair value") of any "property" acquired by way of a "transaction". To bring the sales of shares, members' interests and contingent rights in trusts within the ambit of the charging section, some definitions have been amended and new definitions were introduced in Section 1 of the Act.
Property: The definition has been extended to include:
- an interest in a "residential property company";
- an interest in a holding company (which includes a close corporation) where that company would be a "residential property company" if all its subsidiaries' assets were held by it. This is to ensure that a person cannot escape these provisions by having a multi-tier structure of a holding company and a subsidiary company;
- a contingent rights to a residential property or a contingent right to the first two items above held by a discretionary trust, other than a special trust as defined in the Income Tax Act, 1962, where the acquisition is -
- in consequence of an agreement for consideration in relation to property held by the trust;
- accompanied by a change in the debt or security structure of the trust; or
- accompanied by a change in the trust's trustees.
- in consequence of an agreement for consideration in relation to property held by the trust;
If, for example, the contingent beneficiaries of a trust are the children of Mr and Mrs Smith and a new child is born, which also becomes a contingent beneficiary, this will constitute a "transaction" as defined but will not trigger the payment of transfer duty because none of the three events mentioned above have occurred and there is, therefore, no "property".
Residential property is a new definition and it comprises -
- a dwelling house, holiday home, apartment or similar abode,
- improved or unimproved land zoned for residential use, or
- any real right to these properties.
"Residential property" is defined in the Act as: "… any dwelling house, holiday home, apartment or similar abode, improved or unimproved land zoned for residential use in the Republic (including any real right thereto), other than -
a) an apartment complex, hotel, guesthouse or similar structure consisting of five or more units held by a person, which has been used for renting to five or more persons, who are not connected persons, as defined in the Income Tax Act, 1962 (Act No. 58 of 1962), in relation to that person; or
b) any "fixed property" or a "vendor" forming part of an "enterprise", all as defined in Section 1 of the Value-Added Tax Act, 1991 (Act No.89 of 1991).
It should be noted that some of the land owned by share block companies/companies and close corporations is "zoned" as "nature and game reserve and country housing estate". According to the Provincial Administration's Environmental Planning Division, this land is regarded as rural land and is accordingly not zoned for residential use.
Therefore the property (whether held by a share block company/company or close corporation) is not situated on land zoned for residential use in terms of the Act.
Properties held by substantial business enterprises are excluded from the definition. This is achieved by excluding -
- an apartment complex, hotel, guesthouse, or similar structure of more than five units as long as they have been rented to five or more persons unconnected to their owner, or
- any fixed property of a vendor forming part of an enterprise for VAT purposes.
To prevent persons avoiding the application of this test by introducing other investment assets into the company, all financial instruments as defined in the Eighth Schedule to the Income Tax Act and gold or platinum coins held by the company are disregarded when applying the rest, for example:
Company Smith (Pty) Ltd owns the following assets when the shares of the company are sold:
- a house, which has a fair value of R500,000,
- a boat with a value of R200,000,
- a portfolio of shares worth R300,000, and
- Kruger Rands worth R100,000.
- There is a bond of R200,000 on the house.
Transaction: This definition has been extended to cover all the forms in which shares and members' interests may be transferred from one person to another.
It also brings within the ambit of the definition the substitution or addition of one or more beneficiaries with contingent rights to any property of the trust.
Fair value: This definition has been extended to cover the shares, members' interests and contingent rights as follows -
Shares and members' interests
The fair value of a share or member's interest is the fair market value of the property held by the company on the date of acquisition which constitutes -
- residential property,
- a share or member's interest in a residential property company or a holding company, which together with its subsidiary would be a residential property company if they were a single entity, or
- a contingent right in property of a trust which is attributable to that share or member's interest.
The method of determining the contingent right is set out below. In determining the fair value of the shares or interest, no account must be taken of any lease on the property or liability in respect of any loan or debt related to the property.
It must be noted that the fair value of the property of the company or trust that is attributable to the share or interest must be taken into account. If there were two stakeholders of a company who each acquired 50% of the shares of a residential property company that owned a residential property with fair value of R800,000, they each would have to pay transfer duty on property of R400,000.
Contingent right to a property
The fair value of a contingent right to any property that constitutes:
- residential property,
- a share or member's interest in a residential property company or a holding company, which together with its subsidiary would be a residential property company if they were a single entity, or
- a contingent right in property of a trust when held by a discretionary trust, is the fair market value of that property on the date of acquisition of that contingent right.
In determining the fair value of the contingent right, no account must be taken of any lease on the property or liability in respect of any loan or debt related to the property.
If two persons acquire contingent rights to any residential property held by a discretionary trust that has a fair value of R800,000, they would each have to pay transfer duty on property of R800,000.
Next week: Examples to illustrate the practical effects of the amendments
Republished with permission from SADJ
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