TIPS FOR PURCHASING PROPERTY

• Ensure that you deal with a reputable agent .
• The Financial Intelligence Centre Act (FICA), which has recently been promulgates, calls for all persons entering into financial transactions to disclose all their personal particulars.
• Prior to signing an Offer to Purchase where there are clauses in the contract that you do not understand, please refer to an Attorney for legal advice.
• In all property transactions the following costs are usually paid for by the Purchaser of the property: Conveyancing Fees which include Transfer Duty, Transfer Fees, Deeds Office Levies, Stamp Duty, Pro-Rata Rates and Taxes, Rates Clearance Certificate Costs.
• Coupled to the above, should a Mortgage Bond be required, the Bank will charge the Purchaser (Mortgagor) the following costs: Initiation Fee, Valuation Fee, Administration Fee and the Attorney will charge a fee to register a Mortgage Bond.
• The Seller of the property is liable for the following costs unless another arrangement is made: Estate Agents commission, Entomologist Certificate, Electrical Compliance Certificate, Cancellation fees for any bonds registered over the property.
• Usually The Seller of the property nominates the Conveyancing Attorney

THE TERM IMMOVABLE PROPERTY INCLUDES AMONGST OTHERS:

• vacant erf or erven;
• houses;
• flats and townhouses forming part of a sectional title scheme in terms of the Sectional Titles Act 95 of 1986;
• houses forming part of a group housing scheme;flats and townhouses forming part of a share block scheme in terms of the Share Blocks Control Act 59 of 1980; and
• accommodation in a housing development scheme as defined in the Housing Development Schemes for Retired Persons Act 65 of 1988.

THE COST RELATING TO THE TRANSFER/ PURCHASE OF A FIXED PROPERTY

Transfer duty : Where Transfer Duty is payable, a formula is applicable based on the value of the property. Transfer Duty normally constitutes the majority of the costs and is usually payable by the Purchaser.

Transfer Duty is also payable on the transfer of a member's interest or shares in a company or beneficial interest in a trust. Where the Purchaser of the interest or shares is a natural person, Transfer Duty is charged on a sliding scale while an entity other than a natural person pays Transfer Duty at a flat rate of 10% of the purchase price.

VAT : No Transfer Duty is payable if the Seller is registered as a VAT vendor on date of registration, in which event the Seller is liable to make payment of the VAT, charged at 14%, to the Receiver. The VAT is deemed to be included in the purchase price, unless specified to the contrary in the agreement. In the latter event the Purchaser will have to pay the VAT in addition to the purchase price.

Rates & Levies : Whilst not a cost of transfer, rates and levies must be paid in full on date of transfer. A pro rata (normally to date of possession) portion of the charges is payable on the fixed property to the relevant local authority or the levies payable to the Body Corporate in the case of a sectional title unit.

Fees : The Conveyancer's fees are prescribed by a tariff and are calculated on a sliding scale based on the purchase price. The Purchaser is usually liable for payment thereof together with VAT thereon.

Information on the conveyancing process : "CONVEYANCING" describes the legal process whereby a person, company, close corporation or trust becomes the registered and lawful owner of fixed property and ensures that such ownership cannot be challenged. It also encompasses the process of the registration of Mortgage Bonds.

A Conveyancer is an attorney who by law is the only person who can register fixed property transfers. This is necessary to ensure the protection of the various interests the parties have in the transaction and to maintain the high standard of land registration.

The first requirement is a valid Agreement of Sale. This is a written agreement which is signed by both the Purchaser and Seller (and by the Seller's spouse in cases where the parties are married in community of property, or account to the laws of a foreign country). A written "Offer to Purchase" signed by a Purchaser and accepted by a Seller also constitutes a binding agreement. An oral contract for the sale of fixed property is invalid.

The Agreement of Sale/Offer to purchase is handed to the appointed Conveyancer, who will draft the necessary documents. Both the Seller and the Purchaser will be required to call at the offices of the Conveyancer to sign the necessary documents. The documents to be signed include the following:

• A Power of Attorney to Pass Transfer
• Declaration in respect of Marital Status, Identity Number and Insolvency
• Transfer Duty and Value Added Tax (VAT) Declaration
• FICA Documents
• Bond Documents, if a Mortgage Bond is to be registered

FEES & CAPITAL GAINS TAX

Bond registration costs : Conveyancer's fees are calculated on a sliding scale based on the amount of the bond and are payable by the Purchaser to the Conveyancer who registers the bond.

Bond cancellation costs : If the Seller has a bond registered over the property, this must be cancelled on transfer and the Seller is responsible for payment of the Conveyancer's fees for cancellation.

Capital gains tax (CGT) : Capital Gains Tax is a tax payable on the profit a Seller makes when a property is disposed of, and not on the entire value of the property.

The Profit (Capital Gain) is calculated by deducting the base cost of the property from the proceeds on disposal of the property. Disposal includes sale, donation, exchange, vesting the property in the name of a beneficiary of a trust.

The amount of CGT payable depends entirely on the entity that owns the property.

Non-Residents are also liable for the payment of CGT.

Please Note : This very short introduction to Capital Gains Tax does not purport to contain a complete summary of the Capital Gains Tax Provisions.

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

• Separate legal entity
• Number of shareholders only limited to 50
• Need not be in existence at time of signing agreement

CONS

• Higher rate of transfer duty and CGT than payable by individuals
• Dividends taxable
• No bond may be registered over company property to pay for acquisition of shares therein
• Annual audit is required

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

• Separate legal entity
• Lower administration fees
• Need not be in existence at time of signing agreement

CONS

• Higher rate of transfer duty and CGT than payable by individuals
• Profits taxable
• Ownership restricted to 10 natural persons

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

• An effective estate planning tool
• Assets protected from attachment
• No audit is required

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.