Property owners and other participants in the property industry will be generally disappointed with the 2012 budget that was presented by the Minister of Finance in February. In particular, the increase in capital gains tax rates and the higher-than-expected rate for the taxing of dividends are of concern.
Unlike the quite substantial changes announced last year to the rates of transfer duty for both individuals and corporate entities, no changes have been proposed for the 2012 year.
The rates announced last year will therefore continue to apply. No transfer duty will be paid on properties with a value below R600 000. For property values above R600 001, the rate of transfer duty is 3% up to R1-million. For properties costing more than R1-million the rate is R12 000 plus 5% on the value between R1-million and R1.5-million. For properties over R1.5-million the duty is R37 000 plus 8% above that figure.
Please note this article quotes Transfer Duty rates from 2012. See the latest applicable Transfer Duty Rates here.
Capital gains tax
The maximum effective rate at which CGT is charged increased from 1 March 2012 from 10% to 13.3% for individuals and special trusts, from 14% to 18.6% for companies and from 20% to 26.7% for other trusts. This follows the inclusion rate for individuals and special trusts being increased from 25% to 33.3% and the inclusion rate for companies and other trusts, from 50% to 66.6%.
The amounts at which CGT is payable by individuals have been adjusted as well. There is a proposed increase in the capital gains exclusion amounts from 1 March 2012 for individuals and special trusts from R20 000 to R30 000 annually, on death from R200 000 to R300 000, and on disposal of a small business when a person is over 55 years old, from R900 000 to R1 800 000. Also the maximum market value of assets allowed for small business disposal has increased from R5-million to R10-million.
There is also a change to the primary residence exclusion where such primary residence is owned by a natural person or special trust, used for domestic residential purposes. The exclusion is R2-million from 1 March 2012 (up from R1.5-million) on the calculated capital gain.
The increase in the estate duty threshold to R3.5-million in 2007 remains unchanged, as does the rate of estate duty, at 20%. The 2010 budget recorded that that both estate duty and capital gains tax, which are payable upon death, are perceived as giving rise to double taxation, that estate duty is acknowledged to raise limited revenue, that it is cumbersome to administer and that its efficacy is questionable as many wealthy individuals escape estate duty liability through trusts and other means. It was proposed that taxes upon death will be reviewed and the 2011 budget provided that “the effectiveness of estate duty is being reviewed, with several options under consideration”. There is no reference to estate duty in the 2012 budget review.
Property loan stock companies and property unit trusts
Property unit trusts and property loan stock companies typically provide a commitment to distribute a minimum of 90% of their rental income to investors. The distribution of rental income is effectively tax-neutral in the hands of the property unit trust. Property loan stock companies appear to achieve roughly the same result but without official sanction. They issue investors a dual-linked unit that consists of a debenture and a share with the distribution in the form of interest.
The dual-linked structure needs to be eliminated so that other entities do not undertake the same structure to avoid tax by relying on excessive debt. The governance of property loan stock entities will be placed on par with property unit trusts. Rental income from these entities will fall under the pass-through regime that applies to property unit trusts.
Incentives for the construction of affordable housing
The 2011 budget noted that a tax policy research project was under way to obtain an increase in the supply of affordable housing (below R300 000) where the feasibility of an income tax credit for developers will be explored.
The 2012 budget review records that there is insufficient affordable housing stock for middle-income households above the income thresholds for RDP-type housing, but who cannot afford high mortgage finance. To address this “gap market”, a tax incentive for developers (and employers) to build new housing stock (at least five units in compliance with prescribed standards) for sale below R300 000 per dwelling is under consideration. Options include either a tax credit or a deduction at either a fixed rand amount per unit or as a percentage of the value of the dwelling. This proposal will be refined after public consultation. Policy alignment with existing housing incentives and attempts to unblock regulatory bottlenecks will also be considered. Some low-income employees receive financial assistance from their employers to acquire a house. It is intended that the current tax hurdles associated with such assistance will also be explored.
Share block conversions to sectional title
Company liquidations are generally subject to tax to preserve the company dual-level tax system (a tax on company income plus distribution of that income). The conversion of share block companies into sectional title schemes can create a tax problem. The Budget Review notes that this conversion is a company liquidation in form, but in substance it is merely a change to direct interest from an indirect interest in the underlying property. In these situations, the property owner has swapped interests in favour of a more modern approach. It is proposed that these liquidations receive tax-free rollover treatment.
Municipal Property Rates Act
This regulates the power of municipalities to impose rates on properties. Since the Act came into operation in 2005, several implementation challenges have become apparent. The Department of Co-operative Governance has proposed amendments to the Act to improve its implementation and to minimise legal ambiguities. The Municipal Property Rates Amendment Bill was published for public comment on 9 June 2011 and the Department of Co-operative Governance is in the process of finalising the Act’s amendments.