ALTERNATE ENTITIES
FOR ACQUIRING OWNERSHIP OF IMMOVABLE PROPERTY
WHICH ENTITY OF ACQUISITION
TO CHOOSE ?
The advantages and disadvantages of the
different entities for owning property are
considered hereunder to assist in the selection of a
suitable option.
1 PURCHASING AS AN
INDIVIDUAL IN PERSONAL CAPACITY
Transfer duty is paid on a sliding scale, which is
lower than the rate of 10% charged in respect of
other legal entities.
The first R1 million of any profit made on the sale
of the property is exempt from CGT, provided the
property in question constitutes the individual's
primary residence. This applies to South African
residents only. 25% of whatever profit is remaining
after the R1 million exemption is then added to the
individual's income for the year, and taxed at the
applicable marginal rate of income tax, resulting in
a maximum net CGT cost of 10%. This is the lowest
rate of CGT possible.
On death of the individual, the value of immovable
property will be subject to estate duty, A
R1.5million exemption is granted but the remaining
value is taxed at 20%.
An important consideration is that the property lies
at risk of attachment by the purchaser's creditors.
For this reason, trading individuals may elect to
register property in another entity.
PROS
-
Lowest rate of transfer duty and CGT
-
First R1 million of profit is exempt from CGT, if
primary residence
-
No auditors or accounting officer's fees
CONS
-
R1 million exemption does not apply to
non-residents
-
R1 million exemption does not apply to second or
further properties
-
The properties may be attached by creditors
-
Estate duty payable on death
2 PURCHASING AS A
PRIVATE COMPANY
Companies purchasing immovable property pay transfer
duty at a rate of 10% of the purchase price.
Purchasers of shares in a residential property
owning company now have to pay transfer duty, as set
out in 2.1.1 above. Furthermore, should the company
later dispose of the property, the company will pay
CGT on 50% of all profit earned from the sale of the
property which will be included in the company's
taxable income and taxed at a flat rate of tax of
30% resulting in an effective tax rate of 15% of the
capital gain.
Further, in order for the shareholder to acquire the
profit realized on the sale of the company's asset,
the company will have to declare a dividend which
will be subject to secondary tax at the rate of
12.5%.
A significant benefit of this option is that the
number of shareholders [which can include trusts,
close corporations and companies] in a privately
owned company is limited to 50, as opposed to a
close corporation, which is limited to 10 natural
persons only.
A company is a separate entity and the shareholder's
assets may only be attached to cover debts incurred
by the company if the individual had stood surety
for the company.
At the time of acquisition of the immovable
property, the agreement of sale can be signed on
behalf of a company "about to be formed" and the
contract ratified by the company after its formation
– thereby effectively allowing nominations at the
time of signature without the entity being in
existence or named at the time of signature.
As a company is prohibited from providing financial
assistance to a purchaser for the purpose of or in
connection with the purchase of shares in that
company, no bond may be registered over the
company's property to finance the acquisition of
shares.
A company's financial statements are required to be
audited.
PROS
CONS
3 PURCHASING AS A
CLOSE CORPORATION
Close Corporations face exactly the same transfer
duty, CGT and tax implications as companies do. A
close corporation, like a company is also a separate
legal entity.
Only an accounting officer is required instead of an
auditor, thereby reducing administration costs.
Like a company, a close corporation can ratify a
contract signed by an individual prior to its
formation.
Membership is limited to 10 natural persons.
PROS
CONS
4 PURCHASING AS A
TRUST
Transfer duty is payable at a rate of 10% when a
trust acquires immovable property. Trusts attract
the highest rate of capital gains tax – 50% of al
profits gained on sale of trust assets are included
in the trust's taxable income and taxed at the rate
of 40%, resulting in a net capital gains tax cost of
20% of the capital gain.
Trusts play an important role in estate planning as
the property held thereby does not form part of an
individuals estate on death, and accordingly
benefits from estate duty savings.
A cost incentive is that trusts are not required by
statute to be audited.
Since trusts are separate legal entities the trust
assets cannot be attached by creditors of the
beneficiaries, unlike shares or members' interest,
which provides a safe option to protect assets from
attachment.
Unlike close corporations and companies however the
trust must be in existence at the date of signature
of the agreement as one cannot act as a trustee for
a trust in the course of formation.
PROS
CONCLUSION
The decision on the appropriate entity for the
acquisition of immovable property is not a decision
to be taken lightly. This information provides a
brief guideline and it is recommended that the
purchaser consult with an attorney prior to signing
an agreement of sale in order to obtain expert
advice having regard to the purchaser's personal
circumstances.
Information
supplied by s t r b Smith Tabata Buchanan Boyes
Attorneys.
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