UNIT 7

TAX
Introduction

All entities are subject to various forms of taxes and the tax is not always limited to one type
alone. What is important is to be able to identify where there is or will be a tax effect,
whether positive or negative, and then to be able to use this effect in a positive way or to
reduce exposure.

The Income Tax Act states that if you’re a SA resident (for tax purposes), tax will be imposed
on all income from both SA sources as well foreign sources, regardless of where it is paid. It
also states that non-residents will be taxed on all income received or accrued from SA
sources.

Income Tax

Capital or revenue: Gross income includes receipts of a revenue nature only and excludes
receipts of a capital nature. For example, the disposal of a property held to produce rental
income is of a capital nature, whereas the disposal of a property held as trading stock is
regarded as having a revenue nature. Sometimes this can be confusing. To assist in making
the determination between capital and revenue it is essential that the guidelines established by
the Courts be considered, so-called precedents. Here the intention of the taxpayer during the
period over which the asset was held is considered – the time of acquisition, the holding
period and finally the disposal. Sometimes, to complicate the matter, the taxpayer changes
his/her intention during the holding period! For example, if a taxpayer has been living on a
property and, instead of selling it, decides to develop it, the taxpayer goes from earning a
capital profit to earning revenue from the development and will be subject to income tax.

Deductions and allowances: These are deducted from gross income and are based on the
following:

- Expenditure and losses

- Actually incurred
- In SA
- During the year of assessment
- In the production of income
- Not of a capital nature
- Wholly/exclusively laid out for the purposes of trade.

So, in terms of property, lease costs are deductible in the hands of the landlord. Legal costs
incurred with respect to transfer and conveyancing are not deductible as they are of a capital
nature. Repairs and maintenance of a property are deductible, but one must be careful to
accurately distinguish between maintenance and improvements, which are of a capital nature.
Business entity and property transactions: When purchasing a property, a decision has to be
taken whether to purchase the shares and/or loan accounts or the property itself, and in what
capacity and form. If the shares are purchased you will be saving on transfer duty. If the
property is acquired from the company transfer duty will be payable, depending of course on
the VAT status of the seller.

- When a company acquires a property, the income received from the property will
be subject to tax at the corporate rate. If it is disposed of and has been trading
stock in the company the profits will be taxed at the corporate rate. The
distribution of funds (dividends) is subject to a secondary tax in companies (STC).
There is no transfer duty payable on the purchase of shares of a company.
- The acquisition of a property as an individual/partnership has the advantage that
should there be any tax benefits these will affect the individual directly.
- The Income Tax Act has very specific rules regarding the income of trusts and the
disposal of assets out of and into the trust. They affect the trust and its
beneficiaries as well as the founder. Trusts are also taxed differently from
corporates and individuals.

Share block: Income tax affects the developer, the purchaser of a share block and the share
block company itself. Should the developer be a dealer in property the net proceeds received
on the sale of the shares will be regarded as revenue and subject to tax. If the purchaser of a
share elects to rent out the property the income will be subject to tax. Levies received by the
share block company are not subject to tax.

VAT – Value Added Tax

The sale of fixed property, sectional title units, share block units and timeshare units by a
vendor is subject to VAT. The sale of any of these by a person not registered for VAT will
not be subject to VAT. It is the status of the buyer and/or seller that determines the VAT
treatment. Generally, where VAT is levied on a property transaction, no transfer duty is
payable. However, where no VAT is levied, transfer duty will be payable.

Acting as an agent in the sale of fixed property where commission is earned, will attract
VAT, e.g. if commission of 7.5% is charged on a sale of a house for R500 000, the seller
would pay a commission of R37 500 and VAT of R5 625 (VAT rate of 15% from 1 April
2018) to the agent. This should be shown as 7.5% plus VAT on the agreement.

If the seller is a vendor, the seller must issue a tax invoice for the property sale to the buyer.
A tax invoice in respect of the VAT on the commission would be generated for the seller and
the seller will be able to claim the VAT on the commission as input tax.

Where property is disposed of as a going concern, the sale can be “zero rated” from a VAT
perspective. The implications are that no VAT is payable and one would be exempt from
transfer duty. However, there a number of requirements: both entities must be carrying on
business prior to and after the sale, the sale agreement must contain a statement to the effect
that both parties are going concerns, the sale is between two registered vendors, VAT
numbers must be inserted and the property being sold is capable of being utilised or is
currently utilised to earn taxable income for VAT purposes.
A vendor supplying construction services will be required to levy VAT on every taxable
supply made. The vendor will be entitled to an input tax credit on goods and services which
has been acquired for the purposes of making such construction services available. It is
important to note that any pricing policy should consider the fact that the VAT paid on inputs
is refundable.

Fees charged by engineers, architects, quantity surveyors, town planners, draughtsmen, etc.
will be subject to VAT.

Share Block companies are also within the scope of the VAT net and must register for VAT.
It is payable on the Share Block at the earlier of Date of Agreement or Date of
Transfer/Registration. Where the shareholder subsequently converts to sectional title, no
transfer duty will be payable on the conversion. If a Share Block company rents units to
tenants the rentals levied will be subject to VAT.

Capital Gains Tax

Capital Gains Tax was introduced with effect from 1 October 2001 with the intention of
levying a tax on capital profits. It then became even more important to distinguish between
capital and revenue. A capital gain or loss is the difference between the base cost of an
affected asset and the proceeds realised upon the disposal of the asset. These include movable
and immovable property both tangible and intangible but excluding any assets considered to
be trading stock.

CGT is payable in respect of a SA resident’s worldwide assets and a non-resident’s

immovable property or assets within SA. Capital losses may only be deducted against capital
gains (not income) and any excess loss can be carried forward to the next year’s
determination.

CGT is payable when an asset is acquired or disposed of whenever there is a change in the
ownership of the asset, i.e. when an asset is:

- Sold
- Given away
- Scrapped
- Exchanged like a share swap
- Lost
- Destroyed
- When it is redeemed or cancelled.

Base cost: The base cost includes those costs incurred in acquiring, enhancing or disposing of
a capital asset and will include:

- Acquisition costs
- Incidental costs of acquisition/disposal like legal fees, commission, stamp duty,
transfer duty, advertising costs, broker’s fees and valuation fees.
- VAT
- Exclusions include interest, repairs, and insurance premiums which would
normally be deducted for income tax purposes.
Assets acquired before 1 October 2001 will be subject to different valuation rules. Any
capital gain or loss accrued before is not subject to CGT but any gain/loss thereafter is. One
had 2 years within which to value the property. One can utilise one of the following 3
methods of valuation:

- Market value on 1 October 2001

- Time Apportionment Base Cost
- 20% of the disposal proceeds.

Rates: Capital gains works on an inclusion rate first prior to calculating the liability. The
following inclusion rates are applicable:

- Individuals and special trusts (e.g. created for person with disability) – 40%
(marginal tax rate is 45%, therefore maximum net rate is 40% x 45% = 18%)
- Companies and trusts (e.g. property trusts and REITS) – 80% (tax rate is 27%,
therefore net rate is 80% x 27% = 21.6%)
- Other trusts (e.g. family trusts) – 80% (tax rate is 45%, therefore net rate is 80% x
45% = 36%).

An individual will include 40% of net capital gain in taxable income and so will effectively
pay 18% since the marginal rate of tax for individuals is 45%. A company will include 80%
of net capital gain in taxable income and so will effectively pay 21.6% since the corporate tax
rate is now 27%.

Exclusions: All private possessions including one residential home will be excluded from
CGT (an exemption on the 1st R2m allowed when disposing of a primary residence). If the
private home is registered in a company it will be subject to CGT on disposal. Other
exclusions include:

- Retirement benefits
- Long term insurance
- Disposal of small business assets
- Assets to produce exempt income
- Personal effects
- Prize money and lotteries.

Local Authority Taxes

Property taxes represent a substantial part of local authority revenue. The revenue is used to
provide public services. The base for property tax is some fraction of the assessed market
value of property, land plus structures /improvements. Undeveloped sites generally pay a
heavier tax in order to encourage land owners to develop the land and, in so doing, reduce
their tax liability.

To be able to effectively utilise the property tax system properties have to be valued. In SA
the valuation roll compiled by local authorities is the document containing all this
information. Property owners are given a period within which they can challenge the local
authority on the valuation of their property. This would entail a visit to one’s local authority
before a specific deadline. Property taxes are then based on the valuation roll where a specific
percentage of the value of the property is charged as a property tax.
Transfer Duty

The transfer of land is subject to transfer duty except where the seller is a registered VAT
vendor like a property developer. It is calculated as a percentage of the purchase price with a
number of different percentage categories applying depending on the price of the property.
Transfer duty is payable by the person acquiring the property, the purchaser, within 6 months
of signing the agreement and prior to registration of transfer. Duty is also payable on an
agreement of sale of land on instalments.

Transfer Duty - 2025 (1 March 2024 – 28 February 2025)

Value of Property (Rand) Rate
R0 – R1 100 000 0%
R1 100 001 – R1 512 500 3% on value above R1 100 000
R1 512 501 – R2 117 500 R12 375 + 6% of value above R1 512 500
R2 117 501 – R2 722 500 R48 675 + 8% of value above R2 117 500
R2 722 501 – R12 100 000 R97 075 + 11% of value above R2 722 500
R12 100 001 and above R1 128 600 + 13% of value above R12 100 000