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ESCAPING THE HIGHER CAPITALS GAINS TAX RATE

By Barry Ger, senior manager for corporate tax at KPMG

01 April 2012

 A window of opportunity opens for some companies.

 If your company is thinking of selling any capital assets and its year end is not February  or March there may be a window of opportunity to do it at the lower effective tax rate for a short while.

In his Budget Speech on February 22 2012, Finance Minister Pravin Gordhan announced increases to the capital gains tax (CGT) rates. Companies, trust and individuals would now be paying 18.6% (previously 14%), 26.7% (previously 20%) and a maximum of 13.3% (previously a maximum of 10%)  respectively of any capital gain that arises in their hands from the sale of their assets over to the South African Revenue Service (SARS).

In a new tax bill released on March 13 2012, it has been proposed that these new rates will take effect from tax years beginning from March 1 2012. The tax years of individuals and trusts perennially begin on March 1 anyway so for them the new rates apply already. The tax years of companies, on the other hand, have a multitude of different starting dates which means that some companies, specifically those with tax years that do not begin in March, have a short period in which they can still benefit from the lower rates. This period is, of course, longest for companies with tax years that commence much later in the calendar year or even in the next year. Companies with January 31 financial year ends, for example, will have almost 11 Months, until February 1 2013, to dispose of their assets before the new 18.6% rate kicks in.

The question arises though whether a company that makes use of this opportunity and sells off many of its high value assets before the end of its current tax year would be investigated by Sars for tax avoidance. The answer to this is probably not. Provided the company has primarily a commercial (but non -tax related) reason for making such disposals, it is unlikely Sars would be able to make such a claim stick.

It would be the height of foolishness, of course, for companies to rush off to sell their assets so as to take advantage of the lower rate.  The tax tail should never wag the commercial dog.   However, for those who were contemplating a sell-off anyway, the looming increase in CGT rates would no doubt spur them to make such decisions sooner rather than later.

 
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Posted by on 05/04/2012 in Content

 

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A SPANNER IN THE WORKS – Ensure that your company secretarial matters are up to date

An event worth popping the champagne for is one where you finally conclude a property sale transaction by signing your name on the dotted line.

How annoying would it not be if you should find out that there is a major spanner in the works (that you were blissfully unaware of) which will delay the conclusion of the transfer of a property with almost 2-4 months?

This, unfortunately, can happen to both the seller and the purchaser.  The obstacle referred to here is the silent deregistration of a company by the Companies and Intellectual Property Commission (“the CIPC”) due to outstanding annual returns.  That such an insignificant misstep can have such serious repercussions, is hard to imagine.  It is definitely not a pleasant experience to find out that your company does in fact not exist, even if the situation is just temporary.  The result is that your company can not be party to any agreement while it has a “deregistered status”.

Should you be in a position where your company, as the seller or the purchaser, intends to enter into an agreement for the sale or purchase of a property, ensure that all your company’s secretarial matters are in line to avoid unnecessary delays.

If, after further investigation, you come to learn that your company has actually been deregistered, here is what you need to do:

If your company does not have a designated person attending to the company secretarial work, you can appoint an independent expert or company to manage this process on your behalf.

Firstly, you need to inspect and ensure that the names of all (and only) the current directors of the company are displayed on the CIPC’s records.  If this is not the case, the CIPC will request the signatures of all the directors on their records before making any changes to your company profile that you may request.  This becomes problematic if one or more of the directors might have died or has resigned from the board of the company.  If it is established that the list of directors on the CIPC’s records does not accord with the list of current directors of your company then one has to submit a C.o.R 39 form in order to notify the CIPC that the composition of the board of directors have changed.  This process takes approximately 6 – 8 weeks.

Only once you receive confirmation that the above changes have been effected (if applicable), you may launch an application to have your company re-instated.  This process also takes approximately 6 – 8 weeks to conclude.

Upon receipt of confirmation that your company has been re-instated and is again active, the value of the outstanding annual return can be determined, after which same can be submitted to the CIPC.

As soon as the above procedures have been completed and your company secretarial matters are up to date, you are entitled to enter into an agreement with another party for the sale or purchase of a property, or any other agreement for that matter.

We appreciate that the periods mentioned above (6-8 weeks) are fairly lengthy.  The processing time is solely dependant on the workload, processing time and backlog of the CIPC and is unfortunately not in our hands.

All the abovementioned procedures can be done and managed through our correspondent.  Please contact us at 021 461 0065 or alternatively at legalassist@oostco.co.za for more information in this regard.

 
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Posted by on 15/03/2012 in Content

 

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BUYING YOUR PROPERTY IN A TRUST: IS IT REALLY WORTH IT?

To buy or not to buy, that is the question.

A trust is a legal entity with its own distinct identity. It has the contractual capacity to acquire, hold and dispose of property and other such assets for the benefit of its nominated beneficiaries. All trusts are governed and administered in terms of the Trust Property Control Act, and formed and governed in terms of a trust deed, a written agreement concluded between the trustees and the founder of the trust.

Perhaps the most significant purpose for establishing a trust is the separation of ownership, which is often desired for reasons including asset protection, risk mitigation and limiting ones tax liability. In order for the trust to transact, a trustee(s) are duly appointed in the trust deed who are thereby authorised to act on behalf of the trust. A trustee may act on behalf of a trust provided that he has been duly appointed to act in this capacity in the trust deed, that the trust has been registered with the Master of the High Court and the Master has authorised such appointment in writing by issuing Letters of Authority to this extent. Further, the trustees’ powers to transact are set out in and may be limited by the trust deed.

There are various advantages related to purchasing property in a trust as opposed to buying it in your personal capacity of which the following are the most prominent:

A trust is a flexible vehicle, capable of catering for various changes and uncertainties occurring in one’s life over time e.g. a larger family, death, insolvency, legislative and financial changes and other circumstances.

Since the property is not registered in your name, the value of your personal estate upon death is reduced. The direct implication hereof is a reduction in your estate duty exposure. Also, should the asset value have increased over time, this growth will be excluded from your estate and the capital gains tax (“CGT”) payable on your estate is reduced accordingly. Executor’s fees pertaining to these assets will also be eliminated.

Provided that you do not establish your trust(s) with the intention of prejudicing creditors, purchasing or transferring a property into a trust helps to protect the specific asset from creditors.

It is advisable to create and operate a trust with appropriate tax advice. In this way a trust will enable you to mitigate your tax liability with specific reference to income tax, CGT, estate duty, donations tax and transfer duty.

Trusts are excellent succession planning tools as a property bought in a trust can remain in the trust indefinitely. Consequently, there is no need to transfer the property from the deceased into the name of his heir. In turn this saves on unnecessary transfer costs and CGT duty.

When finance is required to purchase a property in the current “market” the banks are less likely to grant a 100% bond to a trust and demand a deposit of up to 20% when a trust acquires a property. It appears in some instances individuals may receive up to 100% property finance.

Looking at the downside, the following count under the most burdensome disadvantages of purchasing property in a trust .

All trusts are taxed at an income tax rate of 40%. Consequently, it seems to be more favourable to buy a property in your individual capacity rather than in a trust. Here is why: CGT on the growth of the value of the property comes into play once a property is sold.

Trusts are subject to the highest inclusion rate. 66.66% of the net gain must be included in the trust’s taxable income for the year in which the property is sold. Consequently trusts are taxed at an effective rate of 26.6%. This is compared to individuals who are subject to an inclusion rate of 33.33% and a maximum effective rate of only 13.33%. However, if the profit or gains are distributed to the beneficiaries of the trust during the same tax year, the tax payable may end up being the same amount, as if a natural person is disposing of a second property.

Another downside of the trust owning the property is that the founder does not enjoy control over that property as the trust will be the legal owner of the property and the trustees will have the power to administer same.

Therefore based on the above, if administered correctly, one can benefit tremendously from the exercise of purchasing a property in a trust. It is, however, crucial to determine whether the addition of a trust to your portfolio is necessary and beneficial based on your individual needs and circumstances.

 
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Posted by on 08/03/2012 in Content

 

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