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Monday, April 6, 2015 - 02:16
Pulling the carpet…

Transfer duty on the purchase of property was amended quite substantially in the 2015 Budget. “But,” says Louis Venter, Head of Private Clients, Maitland, “what has been intended as a wealth tax might backfire when the forces of supply and demand have permeated through the system.”

Let’s put the proposals into the practical perspective of someone purchasing a property of R20 million.
In the 2014 tax tables the total transfer duty costs would have been a large enough R1 457 000. That amount has just been increased to a mind-boggling R2 037 500 - a tax to be paid just for the privilege of owning a property in South Africa. “At R580 500 more than the 2014 figure it represents a single transaction tax increase of almost 40%,” he points out. “The person selling the property will also face an increased capital gains burden, as the gain that has been made will also be taxed at a higher marginal rate of taxation, plus the asset constitutes an asset on which estate duty might become payable somewhere in future.”
With the change in the rate of tax from 40% to 41% and with the estate duty rate of 20% still in place, the damage does not stop at the transfer duty calculation. If R10 million of the value of the sale constitutes a gain over and above the original purchase value and the owner is an individual, the capital gains cost adds a further R2,05 million to the transaction on the seller’s side (up from R2 million previously). Death duties add another R3,59 million somewhere in future.
So, the sale of a residence valued at R20 million raises direct revenue for the fiscus of R4 087 500. That is an amount equal to 20% of the value of the transaction, and with the addition of death duties, the interest of the state in the ownership and the transaction comes to a staggering amount of R7 677 500. That is a potential total of 38% of wealth taxes on an asset purchased with funds left over after paying 41% on income, he says.
“At some point wealthy individuals will start to reconsider fixed asset ownership in South Africa,” says Venter. “The seller will most probably carry much of the burden on total cost of ownership due to lower demand caused by purchaser resistance. We already see the growth in the upper end of the market dampening relative to the other value brackets. Conversely, scrapping transfer duty on lower cost properties will most probably have the effect of prices increasing further and faster in those segments. The lower cost housing market in SA is already experiencing the highest rate of price growth, making the properties even more unaffordable for many first time house buyers.”
Therefore the net result of the transfer duty amendment might well be that expensive properties become cheaper due to subdued demand - assisting wealthy people to purchase those properties - and cheaper properties become more expensive due to price filling the void of the lower tax burden on lower income earners and the scrapping of transfer duty. Demand in the lower end of the housing market is high.
“I am not sure this is the right way to go,” says Venter. “We want more people to be able to afford houses, not fewer, and there comes a point where the market for expensive properties in South Africa will start collapsing.” For the building industry, which is a high labour intensive industry, this might not be good news as well. A purchaser from abroad will reach a tipping point where it does not make sense to develop high end properties in South Africa any more.
Hopefully, the Davis Tax Committee will take these calculations into consideration when publishing the final proposals on the country’s taxation architecture.

Copyright © Insurance Times and Investments® Vol:28.4 1st April, 2015
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