A trust is a legal entity with its own distinct identity. It has the contractual capacity to acquire, hold and dispose of property and other such assets for the benefit of its nominated beneficiaries. All trusts are governed and administered in terms of the Trust Property Control Act, and formed and governed in terms of a trust deed, a written agreement concluded between the trustees and the founder of the trust.
Perhaps the most significant purpose for establishing a trust is the separation of ownership, which is often desired for reasons including asset protection, risk mitigation and limiting ones tax liability. In order for the trust to transact, a trustee(s) are duly appointed in the trust deed who are thereby authorised to act on behalf of the trust. A trustee may act on behalf of a trust provided that he has been duly appointed to act in this capacity in the trust deed, that the trust has been registered with the Master of the High Court and the Master has authorised such appointment in writing by issuing Letters of Authority to this extent. Further, the trustees’ powers to transact are set out in and may be limited by the trust deed.
There are various advantages related to purchasing property in a trust as opposed to buying it in your personal capacity of which the following are the most prominent:
A trust is a flexible vehicle, capable of catering for various changes and uncertainties occurring in one’s life over time e.g. a larger family, death, insolvency, legislative and financial changes and other circumstances.
Since the property is not registered in your name, the value of your personal estate upon death is reduced. The direct implication hereof is a reduction in your estate duty exposure. Also, should the asset value have increased over time, this growth will be excluded from your estate and the capital gains tax (“CGT ”) payable on your estate is reduced accordingly. Executor’s fees pertaining to these assets will also be eliminated.
Provided that you do not establish your trust(s) with the intention of prejudicing creditors, purchasing or transferring a property into a trust helps to protect the specific asset from creditors.
It is advisable to create and operate a trust with appropriate tax advice. In this way a trust will enable you to mitigate your tax liability with specific reference to income tax, CGT, estate duty, donations tax and transfer duty.
Trusts are excellent succession planning tools as a property bought in a trust can remain in the trust indefinitely. Consequently, there is no need to transfer the property from the deceased into the name of his heir. In turn this saves on unnecessary transfer costs and CGT duty.
When finance is required to purchase a property in the current “market” the banks are less likely to grant a 100% bond to a trust and demand a deposit of up to 20% when a trust acquires a property. It appears in some instances individuals may receive up to 100% property finance.
Looking at the downside, the following count under the most burdensome disadvantages of purchasing property in a trust.
All trusts are taxed at an income tax rate of 40%. Consequently, it seems to be more favourable to buy a property in your individual capacity rather than in a trust. Here is why: CGT on the growth of the value of the property comes into play once a property is sold.
Trusts are subject to the highest inclusion rate. 66.66% of the net gain must be included in the trust’s taxable income for the year in which the property is sold. Consequently trusts are taxed at an effective rate of 26.6%. This is compared to individuals who are subject to an inclusion rate of 33.33% and a maximum effective rate of only 13.33%. However, if the profit or gains are distributed to the beneficiaries of the trust during the same tax year, the tax payable may end up being the same amount, as if a natural person is disposing of a second property.
Another downside of the trust owning the property is that the founder does not enjoy control over that property as the trust will be the legal owner of the property and the trustees will have the power to administer same.
Therefore based on the above, if administered correctly, one can benefit tremendously from the exercise of purchasing a property in a trust. It is, however, crucial to determine whether the addition of a trust to your portfolio is necessary and beneficial based on your individual needs and circumstances.
No, never!
Only one of the two taxes will be payable in a transaction. VAT takes preference over transfer duty.
The VAT payable is taken from the seller’s perspective. If the seller is registered for VAT and the property forms part of that seller’s (vendor’s) taxable supply, then VAT is payable and not transfer duty. However, if the seller is not registered for VAT or the property does not form part of that seller’s (vendor’s) taxable supply, then transfer duty will be payable.
When dealing with a sales transaction subject to VAT, it is important to obtain insight into the Seller’s VAT compliance background - the reason being that SARS is on a war path to put a stop to attempts by taxpayers to avoid paying VAT and/or transfer duty and personal tax. SARS has implemented measures to check a Seller’s compliance records to determine whether the Seller is guilty of not paying timeously, having outstanding payments or even not filing returns timeously. If any of the mentioned circumstances exist, SARS may require the Seller to take certain steps before issuing the transfer duty exemption, such as:
- Resolve outstanding obligations; or
- Provide security for VAT payments of current transaction; or
- Instruct the transferring attorney to undertake to pay VAT directly to SARS from the proceeds of the sale within 5 days of registration.
If you are considering donating a property to a beneficiary, it may be good advice to heed the saying: ‘Nothing is certain but death and taxes.’ The reason is that a donation of immovable property triggers both transfer duty and donations tax!
Transfer duty will be taxed in the hands of the recipient of the donation, and donations tax at 20% of the value of the donation will be levied against the donor. There is a small rebate in that the first R100 000 of property donated each year by a natural person is exempt from donations tax.
The “tax amnesty” introduced by SARS (originally Para 51 and now Para 51A of the 8th Schedule of the Income Tax Act) which allows an “amnesty” to homeowners to transfer properties in which they “ordinarily resided” from a CC, Company or Trust, free of transfer duty, capital gains tax and secondary tax on companies, has been written about extensively.
Although there is a little confusion amongst the general public, it can be confirmed that the “amnesty” period for homeowners to use the Para 51A legislation will only expire at the end of December 2012.
CONDITIONS OF THE AMNESTY
There are two important conditions imposed by the current Para 51A in order for you to be able to get the benefits of this type of “tax free” transfer:
- You must have “ordinarily resided” in the property and
- You must have used the property for “mainly domestic” purposes.
The “mainly domestic” provision relates to the requirement that you must not have used more than 50% of the property for business purposes. Simple enough.
However, the requirement that you must have “ordinarily resided” in the property has caused problems since SARS Guidelines have concluded that the property must then have been your “primary residence”. As a result of objection and recommendations, SARS has recognised that this interpretation might be unduly restrictive since this “amnesty” was introduced to all taxpayers to restructure their affairs in the light of changes in the tax laws.
GOOD NEWS FOR HOLIDAY HOME OWNERS!
As a consequence, a Taxation laws Amendment Bill has been introduced for public comment which seems to remove the “ordinarily resided” provision, making it possible, if the legislation is approved in its current format, that second dwellings used by family members and holiday homes will also be able to be transferred in terms of the “amnesty”. If the Bill proceeds through Parliament in the normal way, it would likely be passed in October or November 2011.