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Daily Archives: 13/11/2014

Buying a new property – Trust or own name?

The holiday season is around the corner and Adrian would like to buy a beach house. He wishes to use this holiday residence mainly as a long term investment by renting it out to other holidaymakers in order to earn extra income. Adrian has also decided that upon his death the beach house must be bequeathed to his sons while his wife receives the rental income earned thereon. Adrian is one of many buyers that have the following question: In which entity should I buy my holiday home?

Each buyer’s situation is different, so there is no one correct answer to this question. The entity in which a buyer should buy his property will depend on his personal financial circumstances and the reasons why he wants to buy the property. In order to make an informed decision, the advantages and disadvantages of Adrian’s options must be considered.

Purchase in personal capacity

If Adrian purchases his holiday home in his personal name, the following principles will apply:

  • No transfer duty is payable on the first R600 000.00 of the purchase price.
    • From R600 001.00 to R1 000 000.00 transfer duty at a rate of 3% of the amount above R600 000 will be charged.
    • From R1 000 001.00 to R1 500 000.00 transfer duty of R12 000 plus 5% of the amount above R1 000 000.00 will be charged.
    • From R1 500 0001.00 transfer duty at R37 000.00 plus 8% of the amount above R1 500 000.00 will be charged.
  • In the case of property purchased primarily as a primary residence, the first R2 million of the capital gain on the sale is disregarded for purposes of capital gains tax.
  • If the property is not purchased primarily for residential purposes the sale will have capital gains tax consequences. R30 000.00 of the total capital gain will be disregarded. After that, 33.33% of the capital gains derived from the alienation of the property will be included in a seller’s annual taxable income.
  • At the owner’s death the holiday home will form part of his estate for estate tax duty purposes. A deduction of R3.5 million against all assets in the estate is allowed with the balance of the estate taxed at 20%.
  • Capital gains tax will also be relevant at the owner’s death, regardless of whether the beach house is sold or not. The fair market value of the property at the date of the owner’s death will be determined and consequently, the growth in the value of the property in his estate will be taxed. If the property is bequeathed to the owner’s surviving spouse, no capital gains tax will be payable. If however the surviving spouse dies or the property is sold, the capital gain on the disposal will be calculated from the date the property was bought.
  • The property will continue to be susceptible to seizure by creditors if the owner of the property becomes insolvent.
  • If the owner dies, his will determines to whom the beach house must be bequeathed. However, complications may arise where more than one heir stands to inherit the beach house. Questions such as who is entitled to use it, who is responsible for the maintenance thereof and who is entitled to the income earned thereon, are often questions that arise when property is owned by more than one owner.

Purchase in family trust

If Adrian however purchases the beach house in the name of his family trust, the following principles will apply:

  • Transfer duty was calculated in the past at a fixed rate of 8% from the first Rand. However, since 23 February 2011 trusts pay transfer duty at the same scale and with the same exemptions as natural persons.
  • Capital gains tax can be calculated in two ways. First, the capital gains can be taxed in the hands of the trust, in which case 66.6% of the profit is included in the trust’s taxable income and taxed at 40%, which results in an effective capital gains tax rate of 26.7%. Secondly, the capital gains can be distributed to the beneficiaries, in which case the capital gains will be taxed at the respective income tax levels of the beneficiaries. Individuals pay income tax at a rate ranging between 18% and 40% and accordingly capital gains tax at a maximum rate of 13.3% will apply.
  • Income earned by the trust will, as in the above case, be taxed in the hands of the trust, or it can be distributed to the beneficiaries in order to be part of the gross taxable income of the various beneficiaries.
  • Income tax and capital gains tax can therefore be reduced by distributing the income and the capital gains of the trust among major beneficiaries with lower income tax levels.
  • No donation tax is payable if the capital gains made on the disposal of the beach house is distributed to beneficiaries.
  • The beach house will not form part of an owner’s estate for tax purposes, and accordingly the trust plays an important role in estate planning.
  • Since the beach house is not part of the owner’s estate, no capital gains tax is payable upon his death.
  • The complications that arise when the beach house is owned by more than one owner can be largely eliminated as the trust remains the owner of the beach house, even after the owner dies.
  • The trust is a separate legal entity and the trust assets are accordingly protected from seizure by creditors.
  • Should financing be required to purchase the beach house, the trustee can apply for financing and the rent the property to Adrian and/or others in order to service the instalments.

It is clear from the above explanation that the objectives of the buyer must be taken into account in order to identify the most appropriate entity in which he can buy his new property. The buyer must therefore ask himself the following questions to determine his position:

  • What do I want to do with the property? Do I buy it for a short term period, or do I keep it as a long term investment?
  • How do I finance the property? Will it be a rental property? How do I structure this?
  • Will I restore and renovate the property in order to sell it again at a profit, or do I buy the property with the intention of bequeathing it to my children one day?
  • Do I wish to protect my assets from creditors?
  • Will the property be my primary residence?

Considering Adrian’s circumstances and objectives, a trust will be an appropriate entity in which to purchase his beach house, especially because he sees it as a long term investment. Adrian will in this case enjoy protection from creditors and not pay estate duty. He can also nominate his sons as capital beneficiaries in the trust to ensure that the beach house is inherited by his sons. His wife can be nominated as an income beneficiary in his trust to earn the rental paid on the property.

Finally, the Minister of Finance’s budget speech for 2013 must be kept in mind. It appears that the flow of income and capital gains through trusts to beneficiaries may come under fire in future. All income not actually distributed to beneficiaries may be at risk of being taxed in the trust. Income that is distributed to beneficiaries will then probably be allowed as a deduction for the trust and taxed as ordinary income in the hands of the beneficiaries.

Yet at this stage the proposed amendments of our tax laws is still only a possibility about which there currently is only speculation. In the meantime it would be advisable to seek professional help in order to assist you in analyzing your financial situation, circumstances and choice of the most appropriate entity in which to buy your property.

The following conclusion can be made: Due to the fact that the first R2 million capital gains made on the sale of your primary residence is exempt from capital gains tax, it may from a tax perspective be preferable to buy your primary residence in your personal capacity. However if your concern is about protection against risk, then a trust that is properly managed is an important option for consideration. If you are buying a second home and your estate is worth more than R3.5 million, you may wish for both tax and protection purposes, to consider purchasing the property in a trust. Most importantly: seek advice as to what is appropriate to your specific circumstances.
13 November 2014  | Weich & Kriel Inc |  News 360 Notifications and Updates

 
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Posted by on 13/11/2014 in Content

 

Before you say “I do”, there’s another popular question that must be answered

Before you say “I do”, there’s another question that must be answered.

November and December – the most popular months for weddings in South Africa – are rapidly approaching.

Without wanting to rain on the parade of the thousands of happy brides and grooms as they prepare to walk down the aisle, a question which has to be asked is: do you know exactly what you are getting yourself in to – financially?

If a recent survey conducted by TransUnion in Hong Kong is anything go by, the answer is probably “No”.

This survey of 250 engaged couples found that over 58% said they had little or no knowledge of their partner’s finances; nor did they trust their significant other with details of their own finances.

In fact, 19% of respondents believed that personal finances should only be discussed after they were wed, although 22% of respondents said they wanted to remain financially independent even after the big day.

TransUnion recommend that engaged couples openly discuss their finances and debts in order to mitigate any financial risks post-marriage.

Understanding your partner’s credit history can help you to avoid surprises and plan better for a secure future.

Work together to ensure that your bills are paid on time. This will help you reduce interest payment and avoid over-stretching yourselves. Starting your new life together could be a lot smoother with a solid financial and debt management plan as well as a monthly budget in place.

 
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Deeds Office Delays

DEEDS OFFICE DELAYS – HOW LONG CAN ONE EXPECT TO RECEIVE YOUR TITLE DEED AFTER REGISTRATION?

The Deeds Office has released its latest communication 17 of 2014 in which it explains that the delivery of registered title deeds is taking 4 months due to operational issues. The effect of this is that title deeds registered on 4 July 2014 will be delivered +/- 10 November 2014.

IS THERE A WAY TO FAST – TRACK A DELIVERY?

One must expect that the deeds will be swamped with requests to fast-track deliveries – but bear in mind that they may approve such as an exception rather the rule.

HOW DOES IT WORK?

One can still apply to expedite title deeds after 21 working days after registration but the deeds office has requested that this only be done in urgent situations as the requests for expedited deliveries has increased dramatically. The application for expedited must still be done on the company letterhead and accompanied by a deeds office tracking print out obtainable from Info Section.

Due to on-going system problems the turnaround times for delivered deeds is difficult to project and one can only submit a follow up request 10 days after the initial request for expedite was given. In light of the above expedited title deeds should only be requested where they are required for an ensuing transaction to allow the deeds office to catch up with the heavy backlog.

 
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THE COMMUNITY SAYS “NO” TO CRIME

THE COMMUNITY SAYS “NO” TO CRIME

We are proud to have been associated with this initiative and to have contributed to enriching the community.

Crime and substance abuse are especially problematic, not only in the community of Riviersonderend but also in various other communities, but we can only hope that this initiative has spawned other communities in doing the same. Crime is an aspect that affects every part of our lives. It has infiltrated itself into our communities and threatened the lives of our children. The community of Riviersonderend decided to say “No!” and put an end to the violence threatening its public.

Oosthuizen & Co. Meyer de Waal contributed with other selected governmental institutions who gathered to attend the Community Crime Prevention Expo held at the local sports ground, on 25 October 2014.

>> CLICK HERE to read more

The propitious occasion was centred on providing the public with information on a number of issues affecting their community. These include domestic violence, drug abuse, children’s rights and safety, victim empowerment and crime prevention. One of the aims was to set up various initiatives to aid in creating a safer community.

One of the major role-players is an organization called BASE! They approached numerous institutions, both in government and private sectors, to assist with donations towards the event. The event started with a crime prevention march from the Riviersonderend Sports Ground. Thereafter, a short prayer and welcome was given followed by a performance by the local drum majorettes.

The SAPS then proudly paraded their hounds and provided an exhibit display. The event featured various information stands which the community could visit. The main outcomes of the event was to educate the community as to where to access the correct information, to ensure that the youth and other younger members of the community can become vigilant and informed of the dangers posed by drugs and crime and that they should steer away therefrom, to enable domestic violence victims in becoming cognisant about their rights and the procedure to obtain legal relief, and also to encourage the community to work together to combat the crime-related problems in their community.

Among the organizations that contributed to the Expo, include the Department of Social Development, Theewaterskloof Municipality, Shell garage, and Oosthuizen & Co. Meyer de Waal. The donations varied from lunch packs and snacks to providing money for the printing of T-shirts.

 
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FLISP – Relief for Property Developers & New Home Owners

Property developers have been hampered by the challenge to deliver a house under the price range of R300 000.00 to make use of the FLISP subsidy and this prevents many aspiring home owners to buy their own homes.

Good news –

The Director General published enhancements to the Financial Linked Individual Subsidy Plan (FLISP) with the view to have a positive effect on the participating number of affordable households and thus address then need of households in the affordable market with specific reference to:

The minimum subsidy payable

The maximum property value

The housing typology

For more info – go to www.flisp.co.za and click on Flisp Adjustments August 2014 under Latest Flisp Info

 
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Getting Married – Ante Nuptial contract – Same Sex Marriages

GETTING MARRIED WITH A TWIST – ENDING UP IN JAM OR JAMMING? If I look at the number of Ante Nuptial Agreements that we have prepared for our clients over the past few weeks – it is clear that “wedding fever” is around the corner.

  • If you are about to get married – contact Meyer de Waal (meyer@oostco.co.za) to discuss the “pros” and “cons” of getting married with or without an ante nuptial agreement. For more information on the various structures – CLICK HERE
  • If you are not quite ready to get married and decide to rather live together – we still suggest that you enter into an agreement – and we will assist you accordingly.
  • Same Sex Marriages. The Civil Union Act 2006 regulates “same sex marriages” – we can assist to prepare your agreement – contact Meyer (meyer@oostco.co.za) to assist.

DON’T WANT TO HAVE A “STIFF RECEPTION” WAY BUT STILL WANT TO CELEBRATE YOUR UNION? GET INTO A FOOD JAM! Many married couples are tying the knot and having their reception in a non-traditional way – most recently, some couples decided to do away with the formal type of stiff wedding reception and opted instead for a Food Jam. Food Jams are social get-togethers, where cooking is only half the fun and new in-laws and families to get to know each other. The Jams are hosted by Masterchef Season 1 contestant Jade de Waal, who hosts special wedding ceremonies followed by a Food Jam – all at their location in Gardens, InAweStays or of your choice. What is a Food Jam ? To find out what a Food Jam is about, CLICK HERE or HERE

 
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Posted by on 13/11/2014 in Content

 

Capital gains tax on two non-rental properties

Capital gains tax on two non-rental properties

Nov 11 2014 15:32

A Fin24 user is confused about the impact of capital gains tax on her two properties which had never been rented out. She writes:

My spouse and I have bought property in 2007 and shortly after that an additional property for my parents to live in. My partner and I are married in community of property and both properties are in our names.

We are planning to emigrate in 2015, however, the question of capital gains tax (CGT) is one of confusion.

We have tried to do research, but not all examples apply to our situation. Technically we have lived in both properties before my parents moved into the second property.

We have never rented it out nor made money in any form from either. In actual fact, both properties where “fixer-uppers”. We had taken personal loans to do this.

We are now planning to sell at the beginning of 2015. We are selling our current property first and we expect to get just over R1m. We owe R750 000 on it.

The second property, which we will move to once the first is sold, is valued at around R880 000 and we owe R391 000.   I have been a housewife since 2007 and my spouse is employed full-time. My spouse gets a basic salary of R12 000 per month and the rest is commission based. The two together per month is around R30 000 to R40 000 gross.

– How will the capital gains tax affect us?

– What type of percentage can we expect to pay?

– If both properties have been used as our living residence in the past and will be in future, can we state this to the SA Revenue Service (Sars) and if so, will it help?

– What type of rebate or discount can we qualify for on these properties?

– Is there anything else we can expect to pay in addition to this?

– Who can you recommend I speak to once we start the selling process of the properties to assist us with the Sars submissions?

Pieter Faber, technical executive: tax law & policy at the SA Institute of Tax Professionals (Sait), responds: How will the capital gains tax affect you?

A capital gain is the difference by which the proceeds on disposal of an asset exceed the allowable costs (that is base cost such as purchase price, transfer fees, sale advertising cost and cost of improvements). The taxable capital gain to be included in your taxable income is 33.33% of the calculated capital gain, after deduction of the annual exclusion of R30 000 and prior year assessed capital losses. Where the capital arises from the disposal of a primary residence, a primary residence exclusion applies where any gain or loss is disregarded, namely where the gain or loss is less than R2m or you must disregard the capital gains if the proceeds are less than R2m. A person can only have a single primary residence at any given time. This exclusion must also be apportioned where the property is jointly owned in relation to the interest held in the primary residence. For example, if you both own 50% and it is both your primary residence, and then you can disregard the capital gain on the first house, which is your primary residence for the whole period from 2007 till disposal, as the pro rata exclusion is then proceeds less than R1m. Alternatively, the capital gain would be less than R1m for each of you. Where the house was used as a primary residence, but also used partially for trade or for a partial period for trade (that is home office or leased it) or the person was not ordinarily resident in that residence for the full period of ownership, then the primary residence exclusion must be apportioned. Where apportionment applies, the R2m proceeds exemption does not apply, only the R2m capital gain exemption. We have assumed that your parents did not pay rent, which would constitute a trade. In respect of the first house that you and your spouse lived in for the whole period of ownership, by applying the above principles, the sale of the primary residence for just over R1m should not result in capital gains tax. Once you have sold the first house and stay in the second house, the second house will be your primary residence. However, as your parents stayed in the house as their primary residence, the primary residence exclusion must be apportioned for that period. For example, the period of ownership will be 2007 to 2015 and if your parents lived there for seven years and you for one year, then the primary residence exclusion must be apportioned by excluding for such a period of use the periods used by you – that is 1/8 x R2m x 50% (jointly owned) capital gain exemption will apply for each spouse, which is R125 000 per spouse. You have not indicated the base cost, but I will give an example of such a calculation by using the value of the outstanding bond as the base cost and using an effective tax rate of 15%, assuming you both earn R20 000 per month. Expected proceeds will be R880 000 less R391 000, resulting in a capital gain of R489 000 or R244 500 per spouse. Of this amount R125 000 must be disregarded and of the remainder R30 000 must be disregarded (that is the annual CGT exclusion) which results in an aggregate gain of R89 500. Of this amount 33.33% is your taxable gain that will be included in your taxable income for assessment, namely R29 833 per spouse, which at 15%, will result in about R4 475 in actual tax payable per spouse.

What type of percentage can you expect to pay? Based on the above example your actual cash tax payable is merely 1% of the proceeds accrued by each spouse.

If both properties have been used as your living residence in the past and will be in future can you state this to Sars and if so, will it help? Paragraph 45(3) of the Eighth Schedule to the Income Tax Act provides that a person can only have one primary residence at any given time which will qualify for the exclusion. The fact that you used both simultaneously is a question of fact as to whether it will assist. Whether you can be ordinarily resident in two houses at the same time is unclear. In terms of case law, it is more probable that the house you are mostly resident in would be your ordinary residence as concluded from the facts. Due to the unclear point in law it may be worthwhile not to pursue this point, but to treat the first house as your only place of ordinary residence while you lived in it.

What type of rebate or discount can you qualify for on these properties? On the first house you are entitled to the full primary residence exclusion of R2m proceeds or R2m of the capital gain as apportioned between the spouses. Once house one is sold and you live in house two for a period of time, you will have to, on disposal of house 2, apportion the primary residence exclusion as detailed above. If you have no other capital gains for that year, you are also entitled to utilise your R30 000 annual exclusion per spouse.

Is there anything else we can expect to pay in addition to this? There are no further capital gains or income tax consequences after the disposal of the houses based on the above facts and assumptions.

Who can we recommend you speak to once we start the selling process of the properties, to assist us with the Sars submissions? You would be best advised on the tax calculation and compliance requirements of this transaction by a registered tax practitioner as registered with Sars and a recognised controlling body.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

 
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Posted by on 13/11/2014 in Content