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Tax Changes Making Property Speculation More Difficult In South Africa

by Robert Lee,, London

01 July 2005

New tax legislation is making it increasingly difficult for property speculators to make a short-term profit from the buying and selling of real estate in South Africa, according to a local expert.

The introduction of capital gains tax on the proceeds of all property transactions, in addition to new reporting requirements to the South African Revenue Service (SARS), are just some of the factors limiting the property speculator's ability to make profits from new developments, Sotheby's International Realty's Schalk van der Merwe noted in a Sunday Times report.

The introduction of the the Transfer Duty Act in 2002 has also curtailed speculators' attempts to tie up property in the name of a company or close corporation, and then sell the shares for a profit, he observed.

Van der Merwe explained that: "Tying up a property as nominee for someone else who is then sourced just before transfer, and who 'buys' the contract for the right to be nominated, has also been blown out of the water, with SARS ruling that unless a nomination is made upon acceptance of an agreement of sale, two transactions have taken place, both which will be subject to transfer duty."

"Another old favourite has been speculators buying from the developer but selling again before transfer, charging a 'cancellation fee' to the new purchaser. Alternatively a tri-partite agreement is entered into between the three parties, substituting the speculator with the third party as purchaser."

"Since 2003, tax legislation provides that should the middleman (speculator) have received but one cent, there shall for transfer duty purposes be deemed to be two sales, both subject to duty at the full value of the property."

"And, yet another favourite is for the speculator to bring a new buyer to purchase at the same price, and then to enter into a private arrangement with that buyer to pay the speculator's profit. Not so clever for the new buyer; as section 20B of the Transfer Duty Act allows SARS to tax this extra transaction, and furthermore the new buyer's base cost for CGT purposes will now be much lower."

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