Fractional ownership plan queried

THE fractional property ownership schemes in SA may be operating in contravention of the Property Time Sharing Control Act, says the latest edition of attorneys’ magazine De Rebus.

This is according to property lawyer Arthur Schoeman, and if what he says is true, the implications for the fractional ownership property industry are dire: with developers potentially falling foul of VAT legislation and scheme purchasers possibly having the right to terminate agreements.

Writing in De Rebus, Schoeman says: “All so-called fractional ownership schemes are in contravention of the Property Time Sharing Control Act.”

He says that in the case where the legal vehicle of the fractional ownership scheme is a company, such schemes are in contravention of the Share Blocks Control Act.

Frans van Hoogstraten, a director of Bowman Gilfillan, agrees with Schoeman’s conclusion.

“A further aspect, however, arises from VAT. In terms of the VAT Act, the sale of equity shares is exempt from the payment of VAT.

“Accordingly, where these fractional ownership schemes are conducted simply through a company without the provisions of the Share Blocks Control Act being complied with, then, on the face of it, no VAT is payable,” says Van Hoogstraten.

In other words, fractional ownership schemes treat the “fractions” purchased by buyers as “equity shares” when in fact they are “share blocks”, which attract VAT.

He says that to the best of his knowledge, most of these schemes are conducted on this basis and no VAT is paid.

Van Hoogstraten says the VAT Act provides for the payment of VAT in respect of the supply of “goods” which, by definition, includes “fixed property” and which, in turn, by definition, includes a share in a share block company and a time-sharing interest as contemplated in the Property Time Sharing Act.

“In short, the sale by a vendor of a share does not attract VAT, while the sale of a share block and/or time-sharing interest does attract VAT.”

He says the developers of fractional ownership schemes could, if they are not paying VAT in respect of their sale, be subject to significant claims for VAT and penalties from the South African Revenue Service.

Henry Greyling, MD of Seeff Fractional Ownership, says fractional ownership intermediaries should seek legal advice when putting schemes together for sale.

Greyling says Seeff Fractional Ownership — a division of real estate group Seeff Properties — has spent hundreds of thousands of rands during the past three years “in getting their product to conform to the law”.

“Purchasers should be cautious in purchasing shares in fractional ownership from fractional companies which are not affiliated with the South African Association of Fractional Intermediaries,” he says.

Seeff is a founder member of the association, which had its inaugural meeting in Bantry Bay last year.

Fractional ownership, in the South African context, generally refers to a division of a particular unit in leisure property between different owners.

For instance, a property could be developed in a game lodge and might then be sold to 12 owners, who would get four weeks a year each in the property.

Fractional ownership has become increasingly popular among South Africans in the past few years. Commentators say it has grown strongly because of the growth in the leisure market.

There has been strong interest because investors are not keen to invest a substantial amount in a home they will use only for four to six weeks a year.

Estate agencies say that fractional ownership schemes offer a more effective use of an investor’s funds, particularly as part of a holiday property portfolio.

Article by: Nick Wilson - www.businessday.co.za