BUYING - No more easy money

Over the past few years it has become increasingly difficult to make 'easy money' by quick buying and selling in the South African property market. This is due to the introduction of capital gains tax as well as other new tax legislation aimed at tightening up property transactions from a tax perspective, according to Sotheby's International Realty's Schalk van der Merwe.

Commenting on the current difficulties faced by property speculators on Monday, van der Merwe noted: "We regularly hear of property developments being bought out within hours of launch. Lured by the prospect of making a quick buck, speculators, whether individually or as a syndicate, buy up property or 'reserve stands' in a new development with the sole intention of selling again for a profit before having taken transfer.

"But speculators have been left with sweaty palms more recently due to the introduction of, among other things, capital gains tax, which imposes taxation on every property transaction. In addition, every property transaction now has to be reported to the South African Revenue Service (SARS), which decides whether the proceeds are classified as capital or revenue".

SARS closes loopholes
Van der Merwe observed that as a way around this, speculators have tried tying up property in the name of a company or close corporation, and then selling the shares for a profit. However, since 2002 the Transfer Duty Act stipulates that such a sale attracts transfer duty on the full value of the property.

"Tying up a property as nominee for someone else who is then sourced just before transfer, and who 'buys' the contract for the right to be nominated, has also been blown out of the water, with SARS ruling that unless a nomination is made upon acceptance of an agreement of sale, two transactions have taken place, both which will be subject to transfer duty.

"Another old favourite has been speculators buying from the developer but selling again before transfer, charging a 'cancellation fee' to the new purchaser. Alternatively a tri-partite agreement is entered into between the three parties, substituting the speculator with the third party as purchaser.

"Since 2003, tax legislation provides that should the middleman (speculator) have received but one cent, there shall for transfer duty purposes be deemed to be two sales, both subject to duty at the full value of the property".

Van der Merwe added that once again, the cancellation fee would be taxable as well, and most likely be subject to income tax, rather than CGT, unless the speculator can prove to SARS that there was no profit-making intent.

"And, yet another favourite is for the speculator to bring a new buyer to purchase at the same price, and then to enter into a private arrangement with that buyer to pay the speculator's profit. Not so clever for the new buyer — section 20B of the Transfer Duty Act allows SARS to tax this extra transaction, and furthermore the new buyer's base cost for CGT purposes will now be much lower. Obviously, once again, the speculator should declare the income, which will be taxable at normal rates."

Don't forget the tax implications
The speculator's quest for easy money is now also fraught with other numerous other pitfalls, including that if SARS detects a pattern of buying and selling over time, the speculator can be classified as a trader in property, thereby tainting the speculator's other (capital) assets. Should SARS rule that tax has been avoided illegally, the penalty is 200 percent on top of the tax, plus interest.

"It is not illegal to speculate, but it is vital to remember that there is taxation involved," van der Merwe cautioned. "Always separate your speculative activities from your long-term investments and do not use the same property vehicle (company, trust, etc) for both. SARS has a myriad of cross-checks in place, so it is not worth taking chances.

"Investments should be chosen on the premise that should one not be able to move them quickly, one is able to hang on to them and feel assured that they will still increase in value," he concluded.

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