Information provided with courtesy of: 
Smith Tabata Buchanan Boyes Attorneys.

In December 2002 the Transfer Duty Act was amended to put a stop to avoidance schemes involving residential properties held in companies, close corporations and trusts.    There appears to be some confusion regarding the effect of the amendments to the Transfer Duty Act, 1949 (the Act) which came into operation on 13 December 2002 and concern the acquisition of shares, members' interests and contingent rights in companies, close corporations and discretionary trusts respectively, where these bodies own "residential property" as defined

In so far as the amendments affect the acquisition of a share or members' interest in a "residential property company" as defined in the Act, it is accepted that these transactions were not subject to transfer duty before the introduction of the amendments and the amendments were intended to create a new charge to transfer duty on the value of these transactions.

As regards the practice which arose prior to the amendments in terms of which interests in discretionary trusts which held residential property were ostensibly acquired by means of the substitution of trustees and beneficiaries in return for a payment or the purchase of the rights held by these persons, the view is held that these transactions are dutiable acquisitions of property for the purposes of the Act.  This is because the transaction or the series of transactions in substance constitute the acquisition of property or a new trust is created as a result of the changes to the nature and character of the trust and the old trust ceased to exist.  Alternatively, the changes resulted in the creation of a trust which exists independently of the original trust.

Prior to this, SARS issued assessments on transactions involving some 1600 trusts.  The duty and interest involved is about R130 million.  Initially SARS was challenged, but these cases have been withdrawn and the trustees have paid their assessments.

Because many parties want to settle their disputes with SARS before the full force of the implementation of the new Transfer Duty system, whereby they will be penalized with 200% ,at rates applicable to natural persons, SARS has proposed the following:

1. If the trustees are prepared to register the properties in their own names, transfer duty at the rate applicable to natural persons will be applicable.  The registrations must be in the name(s) of the person(s) who effectively acquired the interest in the trust  and financed the purchase of the residence.  Registering the properties in the name of children (who may be the beneficiaries) could have serious donations tax implications and cannot be permitted for that reason.

As SARS is applying the principle that the purchaser(s) were in fact natural person(s), a registration of the residence in the names of the natural person(s) must be effected.  Transfer duty will be paid on the amount of the original acquisition paid for the purchase of the residential property, as well as interest at 10% per annum from date of original acquisition.  If the purchase price of the acquisition can not be proven to SARS satisfaction, a fair market value will be applicable.

Once it has been paid, the property must be transferred into the natural person(s) name on or before the 31st of December 2005.

The transfer duty declaration by the seller(s) should be completed by the present trustees and the value of the properties for transfer duty purposes will be the consideration given for the "purchase" of the interest in the trust.  If the name has been changed, the new name should be used.

Authority for this procedure is contained in part III A of Chapter III of the Income Tax act, 1962, which applies mutatis mutandis to the transfer duty act.  If these proposals are accepted, the parties will enter into a settlement with SARS.

Should the trustees wish the registration to remain in the trust, the 10% rate (with interest) will be payable.

SARS has demanded payment of the duty and penalty interest and is proceeding with action to recover the amounts due with the implementation of the new SARS procedures, whereby property transactions will be delayed until outstanding taxes and transfer duties (with a 200% penalty) are recovered by SARS, if still due by a seller or purchaser involved in the property transaction.

Since the property must be registered before or on the 31st of December 2005 anyone wanting to make use of the opportunity, should contact one of our conveyancers as soon as possible.

Written by:  Ellen Louis
The Professionals in Property Law

www.strb.com