FILTERS:

Transfer duty issues - II

23 August 2007

Note: these examples follow on from the discussion in Transfer duty issues - I.

Example 1
Marina purchases the members' interest in a close corporation, which owns a desirable beach-front apartment only, with a fair value of R700 000. The apartment originally cost R300 000, which was funded by a member's contribution of R100 and a member's loan of R299 900.

Marina pays R400 100 for the transfer of the member's interest and pays R299 900 for the member's loan.

As the consideration for the member's interest is less than the fair value of the member's interest, as defined, the transfer duty payable is based on the fair value, ignoring any loan liabilities. The fair value of the member's interest is R700 000, being the fair value of the residential property owned by the close corporation.

Being a natural person, Marina qualifies for the graduated transfer duty rates under Section 2(1)(b) of the Transfer Duty Act, 1949 and is liable for transfer duty calculated as follows:

As of 1 March 2006
0% up to R500 000 R 0
5% from R500 000 to R1 000 000 R10 000
8% on R1 000 000 and above R 0
Therefore transfer duty payable R 10 000

Example 2
The same facts as in Example 1, except that it is Marina's Holiday Home CC that purchases the interest in the close corporation.

In this case, where a closed corporation buys the member's interest, Marina's Holiday Home CC does not qualify for graduated transfer duty rates applicable to individuals and is liable for transfer duty at a rate of 8% in terms of Section 2(1)(a) of the Act. Transfer duty of R56 000 is payable.

Example 3
On 1 April 2003, Jack buys 60 shares and Jill buys the remaining 40 shares in a company that owns a residential property that has a fair market value of R800 000. Jack pays R240 000 for the shares and acquires the shareholder loan account of R240 000. Jill pays R160 000 for the shares and acquires the shareholder loan account of R160 000.

As the consideration for the shares is less than the fair value of the shares, the transfer duty payable is based on the fair value as defined. Ignoring any loan liabilities. The fair value of the shares is R800 000 being the fair market value of the residential property owned by the company.

It must be determined how much of the fair market value of the residential property is attributable to the shares held by each shareholder in order to determine the transfer duty payable by each shareholder.

Jack 60/100 x R800 000 = R480 000
Jill 40/100 x R800 000 = R320 000

Jack must pay transfer duty on the property with a fair value of R480 000 and Jill on property of R320 000 using the graduated transfer duty rates as per the formula given in section 2(5) of the Transfer Duty Act.

Thus we arrive at the following for Jack:
Transfer duty on R480 000 = R21 800 (R9000 + 8% on the value above R320 000) according to rates used on 1 April 2003.

And for Jill:
Transfer duty on R3200 000 = R9000 (R9000 on the value above R320 000) according to rates used on 1 April 2003 .


Example 4
Mr and Mrs Smith, who are the trustees of the discretionary Smith Trust which owns a residential property, enter into a contract with Mr and Mrs Jones in terms of which:
  • the Smiths will resign as trustees of the trust;
  • the Jones's will acquire the loan account of R500 000 of the trust;
  • the three children of the Jones's will be substituted as contingent beneficiaries in place of the children of the Smiths; and
  • an amount of R400 000 will be paid by the Jones's to the Smiths for the appointment of the three children as beneficiaries.
On the date the contract is concluded, the fair market value for the contingent rights in the trust is less than the fair value of the contingent right, as defined, the transfer duty payable is based on the fair value as defined ignoring any loan liabilities.

Unlike the situation with a company or close corporation, the fair market value of the property held by the trust is not apportioned between the three beneficiaries, transfer duty is levied on the total fair value of the contingent right for each beneficiary. The amount of transfer duty each beneficiary will have to pay is calculated as follows:

As of 1 March 2006
0% up to R500 000 R 0
5% from R500 000 to R1 000 000 R20 000
8% on R1 000 000 and above R 0
Therefore transfer duty payable R 20 000

Share block companies
Where shares in a share block company are acquired, transfer duty is payable, if it is not a taxable supply of goods for purposes of the VAT Act (see below)

Example 5
Peter purchases 10% of the shares in a share block company with ten apartments in Waterkloof, Pretoria. The value of the shares purchased is R500 000. Peter receives the right to reside in Flat No. 5, the market value of which is R600 000, which includes a loan account taken over for R100 000.

Because a natural person acquires the shares, transfer duty will be calculated as follows (Section 2(1)(b)):

As of 1 March 2006
0% up to R500 000 R 0
5% from R500 000 to R1 000 000 R5 000
8% on R1 000 000 and above R 0
Therefore transfer duty payable R 20 000

However if Peter's Home Company (Pty) Ltd purchases the shares in the share block company, transfer duty will be payable at the rate of 8%.

Time-share
The Property Time-Sharing Control Act, No. 75 of 1983 defines time-share schemes as follows:
"property time-sharing scheme" means -
(a) any scheme, arrangement or undertaking in terms of which time-sharing interests are offered for alienation or are alienated and the utilization of such interests is regulated and controlled, whether such scheme, arrangement or undertaking is operated pursuant to a share block scheme, any scheme under which time-sharing interests connected with rights to membership of or a participation in any club are granted, any time-sharing development scheme based on the alienation of undivided shares in a unit as defined in s 1 of the Sectional Titles Act, 1971 (Act No. 66 of 1971), or otherwise; or …


Taking the above into consideration, it is clear that where the time-share schemes are controlled through a share block scheme, those time-share schemes fall within the ambit of the amendments of the Act.

Recovery of transfer duty
The liability for payment of transfer duty has been extended for the acquisition of entities holding residential property, in view of the special nature of these transactions and because the usual enforcement mechanism (registration in the Deeds Office) does not apply.

Where the person who acquires the property fails to pay the duty within six months, the public officer and the person from whom the shares or the member's interest are acquired are jointly and severally liable (Section 3(1)(A)). Similarly, the newly named beneficiary of the trust is liable for payment of the transfer duty, failing which the trust and trustees are jointly and severally liable (Section 3(1)(b)). The former persons may take steps to recover this from the person who acquired the property, as set out in the Act.

Exemption from Stamp duty
To the extent that transfer duty is payable on the transfer of shares in a residential property company or a member's interest in such close corporation in terms of the Act, stamp duty is not payable (Paragraph (y) of Exemptions from the duty under Paragraph (3) of item 15 of Schedule 1 to the Stamp Duties Act, 1968 as amended by Section 113 (c) of the Revenue Laws Amendment Act, 2002). This includes transactions on which transfer duty is payable at the rate of 0%.

Documents to be submitted to SARS where the shares/member's interest/rights in a trust are transferred

Copies of the documentation need to be submitted as follows:

Shares in company/members' interests in a CC
(i) Declaration in relation to a change of beneficiaries/shareholders/members - TD 4.(Form TD 4 replaced the Rev 684 form).
(ii) Copy of the purchase agreement.
(iii) A valuation reflecting the fair market value of the property held by the company or close corporation.

Example of how forms must be completed
"50 shares in company XYZ (Pty) Ltd, which has an issued share capital of 100 shares and which owns residential property, are sold by Mr C to Mr A"

Under: "Present shareholder" the TD 4 must read - "Mr C"

Under: "New shareholder" the TD 4 must read - "Mr A"


"Description of property", the Rev 684 must read as follows:
50 shares held in XYZ (Pty) Ltd which holds the following residential property" (followed by a description of the property), e.g. -
Erf 234 Newlands (Johannesburg) Township
Registration Division I.Q
The Province of Gauteng
Measuring 456 (Four Hundred and Fifty Six)
Square Metres.

Contingent rights in a trust

(i) Declaration in relation to a change of beneficiaries/shareholders/members - TD 4.
(ii) Copy of the purchase agreement.
(iii) A valuation reflecting the fair market value of the property held by the trust.

Example of how forms must be completed
A beneficiary obtains a contingent right in a discretionary trust holding residential property.

Under "Present beneficiaries" the TD 4 must state the outgoing beneficiaries.
Under "New beneficiaries", the TD 4 must state each beneficiary who acquires the contingent right.


Under "Description of Property" the TD 4 must read as follows:
Contingent right in XYZ Trust which holds the following residential property (followed by a description of the property), e.g. -
Erf 234 Newlands (Johannesburg) Township
Registration Division I.Q
The Province of Gauteng

Measuring 456 (Four Hundred and Fifty Six)
Square Metres.


Under "Consideration", the greater of the consideration of fair value must be indicated.

Transactions should be processed in accordance with the provisions of Section 3(3) of the Act at the SARS branch office where the property is situated.

Last week: Transfer duty issues - I

Republished with permission from SADJ

Submit your comment:
 
Name
EMail
Comments
Security Picture (click to change)
Word shown in picture: