1 Sep 2005 :

For several years property buyers have avoided transfer duty by simply buying a trust that held a property thereby effecting transfer and avoiding transfer fees - but now SARS has issued assessments against those who partook in the scheme which could leave them with massive tax bills.

Niel Raubenheimer, fiduciary specialist at BoE Private Clients, South Africa’s largest private client find manager says, “Some years ago a practice prevailed whereby the effective transfer of residential property was avoided by making use discretionary inter vivos trusts. 

“A trust would own a residential property and no other assets.  The purchase of the property was usually funded by way of an interest-free loan to the trust by the person who would, under normal circumstances, have been the owner of the property.  The trustees would usually be that person and one or more (usually sympathetic) persons.  The beneficiaries of the trust would usually be that person and his/her family.

“When the ‘owner’ wished to sell the property, instead of transferring it to the purchaser in the normal manner, ‘transfer’ of the property would be effected by the person behind the trust and his/her trustees resigning and new trustees being appointed.  These new trustees would usually include the new ‘purchaser’ and a person or persons sympathetic to that person. The new ‘purchaser’ would usually pay the previous ‘owner’ an amount equivalent to what the property would normally fetch on the open market together with some consideration for the saving in transfer costs.”

Raubenheimer says that this consideration would normally be in order to take over the previous "owner's" loan account and, sometimes, the relinquishment by the beneficiaries of any benefits to which they may be entitled to under the trust. 

“But naturally SARS has taken a dim view of this arrangement.  In a number of cases assessments for transfer duty have been issued by SARS at a corporate transfer rate of 10%. This with the impact of compounding effect of unpaid duties, has added up to a very large bills for about 1600 people so far.”

For example the buyer of a R1m property 10 years ago could face a tax bill of R70 100 being 10% simple interest on the transfer duty over a period of 10 years.

Raubenheimer notes that in the Revenue Laws Amendment Act of 2002, SARS made extensive amendments to the Transfer Duty Act with the effect that these arrangements fell within the ambit of a transfer of property and attracted transfer duty at the corporate rate of 10%. 

“In a press statement dated 15 June 2005 SARS maintains that even prior to the amendment of the Transfer Duty Act, transfer duty was payable because before the amendment of the Transfer Duty Act in 2002, SARS issued assessments on transactions involving approximately 1 600 discretionary trusts.  Evidently further assessments are now being raised against parties not previously assessed.”

Raubenheimer says that SARS has offered to settle these matters on the following basis:

If the trustees are prepared to register the property in their own names or, as in most cases, in the name of the effective "purchaser" then transfer duty at the rate applicable to natural persons will be a payable together with interest at 10% per annum.

Should the trustees wish the registration to remain in the trust, transfer duty will be levied at the 10% rate, together with interest.

The transfer must be effected by 31 December 2005.

“We recommend that anyone who has been assessed by SARS or thinks they may, get in touch with an attorney immediately.

“The matter is likely to end up before the courts in many cases as these transactions normally involved hitherto unresolved areas of trust law.”