August 7, 2004

By Deborah Tickle

With the property market booming, speculators, in particular, should be aware of amendments to the Transfer Duty Act that could cost them dearly.

Changes to the law effective from December 22 last year have given the South African Revenue Service (SARS) new powers to catch people who try to avoid transfer duty on property purchases.

The first change is designed to ensure that transfer duty is paid twice when a property speculator "buys" a property and sells it on to another buyer at a profit before the transfer takes place.

A typical scheme works as follows: Buyer 1 signs an offer to purchase a property for, say, R400 000. Before the property is transferred into his name, he finds Buyer 2, who is willing to buy the property for, say, R500 000. Buyer 1 cancels the first transaction in favour of Buyer 2, who pays Buyer 1 what is termed a cancellation fee of R100 000, and pays the original purchase price (R400 000) to the seller.

In terms of the Transfer Duty Act as it read before the changes, the first purchase agreement involving Buyer 1 would be subject to transfer duty only on any amount paid to the seller, or on any amount paid by Buyer 1 or by the seller (the two parties to the first purchase) for cancelling the contract.

In the example above, Buyer 1 received R100 000 from the new buyer to cancel the original offer of purchase. Buyer 1 would not have paid transfer duty on this amount, because it was paid to him by the new purchaser, Buyer 2, and not the seller. Buyer 2 would have had to pay transfer duty on R500 000 – that is, the purchase price of R400 000 he was paying for the property, plus the cancellation fee – because, in total, this is the amount he paid to acquire the property.

In terms of the most recent change to the Transfer Duty Act, however, if an agreement to purchase by Buyer 1 is cancelled, transfer duty is levied unless the property completely reverts to the seller. In other words, Buyer 1 is liable for transfer duty unless he gives up all rights to the property.

In addition, Buyer 1 may not receive any consideration in return for cancelling the agreement. In other words, Buyer 1 may not receive a cancellation fee.

As a result of this change to the Transfer Duty Act, if Buyer 1 does receive a cancellation fee, SARS will levy transfer duty on the full purchase price as set out in the original purchase agreement (R400 000 in the example above). SARS will also levy transfer duty on the purchase price and the cancellation fee paid by the new buyer (the R500 000).

Another amendment to the Transfer Duty Act is aimed at preventing a property being purchased in the name of a yet-to-be-named buyer. This happens when you secure a property by signing a purchase agreement, but hope to find a buyer to take over the property before the transfer goes through. You sign a sales agreement using the words "or nominee" after your name.

The amendment seeks to ensure that, if you do not name the person who will ultimately buy the property on the day you sign the purchase agreement, you will have to pay transfer duty on the purchase price. Transfer duty will be payable again when the ultimate buyer takes over the property.

There is some debate in legal circles about whether this change will achieve what SARS hopes it will, because of a technicality associated with the use, in the amended provision, of the term "the nominee". But you should be aware of SARS’s intentions with this amendment and avoid using the "or nominee" option, unless you want to take on SARS.

A further addition to the Transfer Duty Act is a new anti-avoidance provision. This allows the Commissioner of Inland Revenue, under certain conditions, to apply transfer duty in cases in which he believes a scheme has been set up to avoid it.

The conditions under which he may take such a step are that you must have received a tax benefit, the transaction must be viewed as abnormal, and the sole or main purpose must have been to avoid the tax.

If he concludes that you have acted with the intention of evading transfer duty, the commissioner is required by law to impose an additional duty equal to double the original duty payable.

All the above amendments apply to property purchases after December 22, 2003.

Deborah Tickle is a tax partner at KPMG.