tax shocker for wealthy property investors
19 November 2007
That's the upshot of a recent Johannesburg Special Tax court judgment, set to hammer wealthy people who have used family trusts to acquire expensive property.
Paul Ferreira, new tax expert at Maitland in Johannesburg, told Realestateweb the latest judgment could get the tax collectors "dusting off" old letters and demanding transfer duty on property sales. "For years wealthy people have been wont to acquire their expensive residential properties in family trusts for various reasons, including estate planning and tax planning. Prior to 2002, when the law changed, in some cases the trust, rather than the trusts property, was sold with the object of avoiding transfer duty, which could be as high as 10%," said Ferreira.
Explaining how rich people manoeuvre around transfer duty, he said: Assume the trust held residential property as its only or principal asset, which it had agreed to sell to A, an unrelated party. The acquisition of the property by A would be subject to transfer duty, payable before the transfer of the property.
However, to avoid the duty the trustees of the trust and its beneficiaries were changed to persons nominated by A and, after payment of the trust creditors, the balance of the purchase price was paid to the trust beneficiaries. Frequently the "purchase price" was funded with borrowings secured by a mortgage bond over the trusts property, he said.
Ferreira pointed out that the advantages of these steps included a higher sale price for the seller or an affordable or lower acquisition cost for the buyer. Some estate agents and tax advisers considered this a safe way of avoiding transfer duty, he said.
However, the Receiver, upon learning of this, took a different view and sent out standard form letters to some of the trusts concerned demanding payment of transfer duty. Mostly these letters were either ignored or replied to denying liability for the duty.
The Receiver apparently then went silent - save for a 2002 amendment to the Transfer Duty Act, which effectively plugged the loophole. But on 26 October 2007 the Johannesburg Special Tax Court delivered judgment holding that a 1998 "sale of a trust" did result in a transfer duty liability, and upheld an assessment on the trust concerned for transfer duty and, in addition, a penalty of some 42% of the transfer duty.
Ferreira added that it seems likely that the Receiver now will be dusting off those old letters, and that there may be some worried residential property trusts that were sold before 2002 without the payment of transfer duty. He said the penalty for the late payment of transfer duty is 10% a year.