2016 Taxation and property ownership
As is the custom every year in February when the Finance Minister tables his budget before Parliament, changes to the tax regime are made. These changes always carry a wide range of increases for employed individuals, businesses and on certain goods and services.
South Africa is yet to witness a decrease in the annual tax burden on households and businesses. Providing tax relief has long been seen as a potent supply-side economic stimulus putting more disposable income in the hands of consumers and investors. It was Ronald Regan who was the first US President to cut taxes with the aim of stimulating the US economy.
When we as South African’s discuss our tax regime rarely is the question posed – Do our tax rates discourage productivity and investment? By this, Samantha Anderson, Deal Core’s resident economist and industrial property specialist means “Are we being taxed to an extent that discourages individuals and businesses from working harder and investing in income generating assets?” One key asset is property.
When investing in property, there are both entry and exit taxes; namely VAT or transfer duty when you acquire a property and capital gains tax when you sell.
A decision to buy or sell a property can be solely influenced by the tax payable on the transaction by either the buyer or seller. “This is evidence that our current tax rates are influencing property investment decisions” says Samantha.
Whilst residential property is rarely owned in a VAT registered entity unless it is a development site, commercial and industrial property is. Hence the VAT implications of buying and selling this asset class should be fully understood and taken into consideration.
“I have had two deals fall apart because of the VAT implications” says Samantha. Buyers are unwilling to pay the VAT on a property purchase and would rather look for alternatives. Considering that VAT can add 14% to the purchase price it is not surprising that some buyers walk away. Transfer duty is levied on a sliding scale ranging from 3-13%. The Treasury just increased it from 11% this year.
There are obviously no VAT implications if the buyer and seller are not VAT vendors only transfer duty applies. However, if either one of them are, there are VAT implications.
If the seller is a VAT registered entity and the buyer is not, the seller will be liable for the VAT and no transfer duty is payable. The seller will pass this liability on to the purchaser and this is where problems often arise.
If the buyer is a VAT registered entity and the seller is not, no VAT is payable only transfer duty. However, the VAT registered entity buying the property can claim an input tax credit for the transfer duty.
If both the buyer and seller are VAT registered entities, the seller is liable to pay the VAT and the purchaser can claim an input tax credit of 14% of the purchase price. Hence the transaction becomes VAT “neutral” as the seller will pass the liability for the payment of VAT to the purchaser who can claim it back.
A zero rated transaction in VAT terms applies to both residential and commercial property that has an existing lease in place. In the case of a zero rated residential property transaction, the purchaser does not have to pay VAT, but is liable for transfer duty. However, if the seller had claimed an input tax credit when buying the property or claimed input tax credit for expenses incurred with regard to the property, the exemption falls away.
It is important to note that in a zero rated transaction, a prudent seller should insist on a clause in the Sale Agreement to record that should the seller become liable for the payment of VAT that the seller will be immediately be able to recover payment of the VAT, interest and any penalties from the purchaser. A purchaser should not object to the insertion of this clause as the purchaser would be entitled to claim back the VAT as an input tax credit. If the clause was not inserted SARS could, after transfer has taken place, resolve that the transaction did not qualify for zero rating.
In our article next week, the Capital Gains Tax implications of selling a property will be explored.
However, before you can acquire property in the first place, there is the affordability test. Net disposal income after tax and expenses is the test of whether or not you can enter “the club” of property owner and qualify for finance.
Having reviewed the 2016 changes to taxation laws, “I wanted to calculate exactly how much tax a person earning R25 000 per month actually pays”, says Samantha as this level of income represents the middle of the tax tables.
The calculation includes income tax, VAT, fuel levies, rates and excluded excise and transfer duties and tyre levies. To do this the net income after personal income tax was broken up into the “biggies” of bond repayments, school fees, fuel, rates and groceries the remaining expenses such as medical aid, entertainment, clothing, insurance etc. are all lumped into a remaining spend which is assumed to only attract VAT.
The result calculated was 32% of the R25 000 earned each month is paid in various taxes which total R8 053.54. This means that one third of middle income individuals’ earnings are taxed. This excluded a person who saves, drinks or smokes and bought new tyres or a property that month.