Impti du toit

SARS' new ruling on tripartite agreements has closed the loophole that existed in three-way property deals, making the practice of buying and re-selling property before transfer less lucrative.

Ian Slot, chairman of Seeff Properties Western Cape, has voiced his concern, saying that the new ruling will be detrimental to both the fiscus and the property development industry.

He is requesting that the ruling should be reconsidered.

Seeff gives as an example to illustrate such agreements: A, usually the developer, sells to B, say for R500 000, when the development is launched. Sometime between the time of the launch and completion of the development, B on-sells to C, say for R700 000. A tripartite agreement is signed between A, B and C, in terms of which the property is transferred directly from A to C for R700 000. A would then receive R500 000, B would make a profit of R200 000, and C would pay the transfer duty - in this case an amount of R48 064 on the total purchase price of R700 000.

The impact of the new ruling, which was implemented on December 22 is that transfer duty (which would amount to R30 240) must now be paid on the R500 000 sale from A to B, in addition to the R48 064 transfer duty on the R700 000 sale from B to C.

The total transfer duty on the deal would come to R78 304.

Speculators who are buying and on-selling property to make a quick profit and avoid transfer duty will be hardest hit.

Slot cautions that speculators who have made use of this method in the past will now have to tread more carefully if they want to avoid making a net loss. While buying off-plan has become popular with short-term investors, speculators will have to ensure they have the funds before investing.

He says the returns they should look to make must exceed the costs incurred from transfer duty, capital gains tax and agency commission, if applicable.

Slot admits that Seeff became concerned when the agency started to see many of the same names appearing as buyers in various developments.

Many of these buyers are going to experience problems now because the additional transfer duty will make it difficult, if not impossible, for them to come out of the deal with a positive cash flow.

The implications are that buyers will most likely have to take transfer of their units and, if any of them lack the resources to meet all their commitments, a number of developments could come under pressure when it comes to transfer.

Seeff is concerned about the wider impact of this ruling on the property development industry.

The system previously made it attractive for intermediaries to assume some of the risk required, thereby stimulating the market and increasing aggregate property investment.

Seeff believes the SARS has done particularly well from the booming property market and rather than stamping it out, should encourage this practice.