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Transfer duty, companies and CCs

9 April 2009

Some comments have recently been made regarding the assessment of transfer duty with regards to the transfer of shares in a company and the transfer of a membership interest in a close corporation.

According to section 1 of the Transfer Duty Act, a company includes - (a) any association, corporation or company (including a close corporation). Furthermore, according to the same section, property is described as follow:

"property" means land in the Republic and any fixtures thereon, and includes-
(d) a share or member's interest in a residential property company; or
(e) a share or member's interest in a company which is a holding company (as defined in the Companies Act, 1973 (Act No. 61 of 1973) or as defined in the Close Corporations Act, 1984 (Act No. 69 of 1984), as the case may be), if that company and all of its subsidiary companies (as defined in the Companies Act, 1973, or Close Corporations Act, 1984), would be a residential property company if all such companies were regarded as a single entity;

Therefore transfer duty is payable (in the case of a company or close corporation) at a rate of 8% on the amount of consideration if consideration is payable or, where no consideration is payable, on the open market value of the property / shares in the property (section 2(1)(a)).

According to the above mentioned comments, in the case of a company, the sale of shares is classified as an undivided share sale which means that, in terms of section 2(5) of the Transfer Duty Act, one would calculate the transfer duty on the entire value and then divide this amount by the share being acquired. In contrast the commentators say that in the case of the sale of a members interest section 2(5) is not applicable and the duty will be payable on the consideration payable for the members interest. It is unclear whether this is the view of the commentators or whether they are merely stating the method that SARS use for assessments.

Section 2(5) of the Transfer Duty Act 40 of 1949 reads as follow:

2. Imposition of transfer duty-
(5) Where a natural person acquires any property consisting of or including an undivided share in any property (hereafter in this subsection referred to as the joint property), the duty payable in respect of such acquisition shall be calculated in accordance with the formula in which formula-
(a) "y" represents the duty payable;
(b) "a" represents the value on which the duty is leviable in terms of
subsection (1);
(c) "b" represents an amount equal to the sum of-
(i) the amount represented by "a"; and
(ii) the value of the remainder of the joint property (being the share or shares in the joint property remaining after excluding the aforesaid undivided share), assuming such value to be an amount which bears to the value of the said undivided share (being the value thereof represented by or included in "a") the same ratio as the said remainder (expressed as a percentage of the full ownership of the joint property without regard to the value of that property or any share therein) bears to the said undivided share (expressed as a percentage of the full ownership of the joint property without regard to the value of that property or any share therein); and
(d) "c" represents the duty which would have been leviable at the rate prescribed in subsection (1) (b) on the amount represented by the symbol "b" in the formula if that amount had been the value on which duty was leviable under subsection (1).

Section 2(5) deals with the acquirement of an undivided share in the property by a natural person and is applicable in the case of a person married in community of property or in the case of a partnership where one or more of the partners are a natural person and the partner acquire an undivided share in a property. The interpretation that companies hold undivided shares are therefore not correct and should not be interpreted as such. I am of the opinion that section 2(5) is not applicable to either companies or close corporations and that the assessment for transfer duty should in both instances only be on the amount of the consideration payable.

Corné Bekker



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