TRANSFER DUTY PAYABLE ON RESIDENTIAL PROPERTY COMPANY.
It was afternoon braai after watching the biggest South African soccer derby game, a friend of mine shared with me his intention to sell shares in his residential property company.
He was taken aback when the potential buyer negotiated the asking price down on the basis that he has to pay transfer duty on the purchase of shares. This led me to ask myself on how many property owners are aware of this? Negotiations tactics used here is a topic for another day.
The issue of paying transfer duty on shares purchased from residential property came into effect in late 2002 replacing the then tax on securities.
What is Residential Property Company?
A residential property company is a company that holds residential property (or a contingent right to residential property held by a trust) and where fair value of the residential property (and the contingent right) comprises more than 50% of the aggregate fair market value of all assets held by the company on the date of acquisition of the interest in the company.
The residential property company shares will be deemed property as defined in transfer duty Act and will trigger transfer duty tax to be payable on their acquisition. The transfer duty will be payable on the value of the property they represent not on shares actual value.
Now assume you want to buy 500 shares in a company with a total fair value of R10 000 000 in the residential asset. Your shares say makes up 50% ownership.
First, the principle ignores liabilities in the company but zoom into the total fair value of the assets held by the company.
Now the purchase of 50% above will be equal to R5 000 000 worth of assets which transfer duty will have to be paid on.
The transfer duty in South Africa currently ranges between 0% and 13% scaling as per the table below.
|VALUE OF PROPERTY (Rand)||RATE|
|900 001-1 250 000||3% of the value above R900 000|
|1 250 001-1 750 000||R10 500+6% of the value above R1 250 000|
|1 750 001-2 250 000||R40 500+8% of the value above R1 750 000|
|2 250 001-10 000 000||R80 500+11% of the value above R2 250 000|
|10 000 001 and above||R933 000+13% of the value above R10 000 000|
At the end of the transaction concluded, my friend above will have to pay Capital gains tax if any and the purchaser will have to transfer duty.
The transfer duty will have to be paid within six months from the transaction date. Any unpaid transfer duty beyond six months will incur interest on month completed until the balance outstanding is paid up.
I was gladly happy to represent my friend in negotiations and he was happy to have received what he deemed fair after transaction conclusion while purchaser walked away happier. Everyone left the negotiating table as winners.
Feel free to contact us if you have any tax questions on your property portfolio or looking at buying an investment and will like to engage our property deals structuring expertise.
Ps: The Braai was lekker!———————————————————————————————————————————————————————————————————————