Introduction

VAFS Inc “Value Added Financial Solutions” was established mainly as an accounting and auditing firm with emphasis on adding value. Our client composition and experience over the years sparked an interest in the property industry.

Our combined knowledge of property, related taxes, the Companies Act, Tax Act, IFRS, trusts and company structures as well as our affiliation with the leading trust attorneys in the country allows us to offer unique solutions to the distressed property industry.

Our aim is to educate potential buyers and investors as many potential buyers and investors are not familiar with the options when purchasing property and are not aware of future tax and legal implications.

We also assist sellers in obtaining the best tax position when selling a property by applying the tax act and any new legislation such as the new SARS window period that allows you to transfer your primary residence tax free from your trust or company in order to ultimately qualify for the primary residence exclusion.

Should I purchase property in a Trust, CC, Pty or in my own capacity?

Have you given thought to what would happen to your property in the event that a creditor sues or claims you are retrenched or in the event of death?

Have you taken into consideration future tax implications based on your decision on how to purchase property now?

The best vehicle to hold property in would depend on your long and short term goals as well as your current financial affairs and whether you are purchasing/holding a primary residence or investment property.

Trusts

Trusts provide the optimum protection for assets, including property.

Various structures can be set up to protect business assets, personal assets and property. It is also recommended to separate personal assets when owning a business.

Benefits of buying/moving property into a trust

• Protection against creditors.

• No estate duty on assets in the trust.

• Assets in trust not frozen upon death.

• Protection of assets in the event of divorce or separation.

• Elimination of executers fees.

• No Capital Gains Tax on death.

• Protection of minors

• Tax rate: 40%

• CGT inclusion rate 50% (in other words 50% of your capital gain will be included and taxed at 40%. (20% effective rate)

However through the use of the “conduit principle” income in a trust may be transferred into the hands of the individual and taxed at a lower rate.

An example: The law does not allow for minors to directly inherit. Leaving assets to minors will result in all assets liquidating to cash upon death as the Guardians Fund only administrates cash. A further downfall is that he cash in the fund only earns +/- 2% interest.

Companies and CC’s

You can set up a share trust that owns the shares in a property company to make use of the lower tax rate when earning rental income. This way your property will still be protected.

On 11 January 2006 the law changed and member’s interests in a CC may now also be held by a trust.

• Tax rate: 28%

• CGT inclusion rate: 50% (effective 14%)

Individuals

Individuals are taxed on a sliding scale from 18% to 40%. The inclusion rate for any Capital gain is 25%. (Effective rate 4.5% - 10%)

However property owned on death would trigger a deemed disposal to the estate and attract Capital Gains Tax at +/- 10%. Primary residence on death is exempt from CGT. Estate duty is levied at 20% for assets in excess of R3.5 mil and executers fees is charged at +/-4%.

Latest Property News:

1. SARS Window period relief:

For individuals owning their primary residence in a company or CC, SARS has opened up a window period from 1 January 2010 to 31 December 2012 in which you may transfer your property into your personal name without paying any transfer duty, CGT or STC. Trusts have also now been included. See our news page for more details.

Benefits of moving your primary residence from a Company or CC:

• No transfer duty

• No Capital Gains Tax

• No STC

• Utilisation of the R2 mil (R1.5 mil of capital gain) primary residence exclusion upon selling.

1. Section 42 Asset for share transfer

Section 42 of the income tax (2008), now allows you to transfer assets to a company in return for shares without any CGT or securities transfer fees.

This means that you can transfer an existing property into a trust or a company without having to pay Capital Gains Tax as a deemed disposal per the eight schedule.

No transfer duty will be payable under this method when the supplier and recipient is deemed to be one in the same person in terms of section 8(25) of the VAT Act, 1991.