As of January 1, 2009 the definition of the dividend paid on property assets will change and this will make a significant difference to the way the secondary tax on companies (STC) will be handled.
Tax partner at Cameron & Prentice Chartered Accountants, David Warneke, illustrates the change by way of example.
"Say a close corporation purchased a building (as a capital asset) in 1990 for R2m. The value of the building on October 1, 2001 (the date on which capital gains tax became effective) was R5m and the value today is R12m.
"If the close corporation were to sell the building today for R12m, distribute the proceeds as a dividend to its members prior to January 1, 2009 and then deregister, the STC would be worked out on the post-2001 portion of the increase in value - that is, on R7m," he says.
Were the proceeds to be distributed after January 1, 2009, the STC would be calculated on the total gain - on R10m - resulting in additional STC of R272,727, assuming that there are no other reserves in the close corporation.
Many investors have utilised trust structures as a shelter against tax.
Warneke says that properties which are directly owned by a trust will not be subject to the same legislation. However, if the trust holds a controlling interest in a company or CC, which in turn owns a property, then this will be subject to the tax.
With this change in the way that gains will be treated, property owners will need to take a decision on which way the property market is headed.
Recently released poor figures relating to the residential property market and warnings from the head of a major real estate agency may encourage highly geared investors to consider exiting these positions.
Property investors should take into account the tax implications and make a call on their exposure to the market. - Marc Ashton, Fin24.com
Readers' Comments
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I can grasp the concept of capital gains tax, but what has been totally ignored to date is the effect of inflation on the value of the asset.
Although more difficult to administer, perhaps SARS could get the annual inflation rate (as published) and build that into the calculation, as this cannot be regarded as "real" growth.
Then taxation would be levied on actual growth, ignoring the effect of inflation. This would however mean less money in the coffers of the government, but would be a more accurate calculation. - Geoff Hope
Interesting. What is the implication if the close corporation was sold?? - Pierre Mouton
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