Archives: General Interests & News Flashes

We recently put out a Newsflash dealing with the right of property owners in single residential zones to build an additional dwelling on their property. This Newsflash has elicited quite a response and we have received numerous questions about the tax implications of exercising the right, either by way of subdividing (if allowed) or by way of Sectional Title. If you haven’t read our earlier Newsflash we recommend that you do so before reading this one, as without it some of the content hereof might not be particularly clear. Our prior Newslash can be found at: 2nd Dwelling Restrictions

Here are some of the questions which we received along with our reply:

1. If I exercise my right by building a second dwelling and I sell it immediately as a sectional title unit for a profit what will the tax consequences be for me?
   • Answer – Income tax is applied to all profit made in the process of a deliberate business activity even if it is a once-off activity. When you do this, you are no different from a traditional developer who also pays income tax on the profits made from the sale of properties he has built. SARS will assess your profit as being the result of a business activity and the profit will be added to all your other taxable income and subjected to income tax. Personal income tax for individuals tops out at 45% once you earn more than R1.5 million per annum.
2. Would it be different if I didn’t apply the sectional title solution and managed to rather obtain the right to subdivide and then built and sold?
   • The answer would be the same
3. If I exercise my rights by converting my existing dwelling ownership into sectional title, reserve to myself the right to build an additional dwelling and then sell that right immediately what will the tax consequences be for me?
   • Answer – The consequences will be exactly the same as in question one above. SARS will conclude that you made all these changes with the view to making a quick business profit and will add it to your existing taxable income and subject it to income tax.
4. What if I implemented the steps set out in question three above but didn’t sell the right to build the additional dwelling immediately and kept it as a long-term investment hoping that it would become more valuable as time goes by .
   • Answer – Once again the consequences will be exactly the same as per questions 1 – 3. The fact that you do not intend to sell it immediately and make an immediate profit does not detract from the fact that you implemented this solution with the view to selling the right and making a profit. The profit (when it is finally realised) will be subjected to income tax.
5. What if I exercise my right by building a second dwelling as contemplated in paragraph 1 or 2 above and then decide to keep it as an investment and lease it out on a monthly basis to make a rental return on my investment ?
   • Answer – You will pay income tax on the profit which you make from your rental enterprise. In other words, after deducting from the rental any costs of ownership of the 2nd dwelling such as maintenance, the interest included in any bond payment, rates and taxes and insurance et cetera the balance will be profit subjected to income tax.
6. What if after a while as per my question 5 above I decide that I no longer want to be bothered with tenancies and rental collection and the like and sell the 2nd dwelling that I built and make a profit on the sale?
   • Answer – That profit will not be subjected to income tax. There is another tax waiting for that profit namely capital gains tax. That is fortunately a much lower tax than income tax. Capital gain tax is applied to the profit which is made when you sell an asset which you never acquired initially for purposes of resale.
   • The classical example is if I buy a fruit tree with the intention to sell the tree I will pay income tax. If I buy the fruit tree with the intention to sell the fruit I will pay income tax on the fruit sales. If I decide to get out of the business of selling fruit and then sell the tree I will pay capital gains tax on the gain I make when selling the tree.
   • The determination of which tax applies depends on the state of mind of the taxpayer. Having said this SARS will be extremely suspicious if you maintain your rental business for only a month or two and then sell. In such circumstances SARS will suspect that it was your intention when you built the second dwelling to sell it for a profit and your profit will be subjected to income tax. The calculation of the capital gain tax which you will have to pay is quite complex but as a rule of thumb for human beings you will pay a maximum of 18% of the total profit/gain as tax, (and then only if you already earn more than R1.5million a year).
   • In determining your profit/gain you will deduct from the sale price of the second dwelling the costs of constructing it and of course the costs of establishing the sectional title structure and estate agents commission.
7. What if along the way in any of the circumstances stated in the questions above I decide to sell my original home?
   • Answer – You will not pay income tax and will only pay Capital Gains tax on any amount that exceeds R 2 million net gain. (i.e. the first R2million net gain is exempt from CGT on a primary dwelling). The net gain will be calculated in the same way as above.
   • NB – If capital gains tax is payable then, along with your other usual income tax, it is payable at the end of the financial year in which the sale occurred (not date of transfer!)

Lastly, there Is a special rule applicable to non-residents. As SARS is afraid that non-residents will take their profits and leave the RSA, conveyancers are obliged (if the sale price is R2 million or more on any sale of immovable property) to retain a portion of the purchase price of the property on transfer (it ranges from between 7.5% for individuals; 10% for companies and 15% for Trusts). The seller is then required to go to SARS and to calculate the correct amount of capital gains tax to be paid and to obtain a written ruling.The conveyancers will then pay that to SARS and pay the rest (if any) to the seller. The effect of this on non-residents is that they have to pay the capital gains tax immediately.

If you wish to read up more on the topic of CGT v income tax, visit this hyperlink: http://www.dejure.up.ac.za/index.php/en/volumes/45-vol-1-2012/82-notes2.html. The bottom line is that a proper financial analysis with a tax expert is advised, before you embark on this journey. Either way though, if you end up paying more tax, it means you are making more money – The question you ought to ask yourself is which structure will result in the least amount of tax!

Kindest regards,

Milton Koumbatis (Consultant); Robert Krautkramer (Director)
Miltons Matsemela Inc

“It is declared that, upon transfer of a property, a new owner is not liable for debts arising before transfer from the charge upon the property …” (Constitutional Court Order)

How does the recent Constitutional Court decision on “historical rates” affect you in practice?

Understanding the issue

At issue was that some municipalities would force new property buyers to pay the seller’s “old” municipal debts (rates, municipal services etc). So you could buy a house thinking that all you had to pay was the purchase price and transfer costs, and end up having to pay old municipal debts run up by previous owners.

We’re talking potentially big money here – R6.5m in one of the cases in question. And you had to cough up or face losing your home to a sale in execution, as well as threats to disconnect electricity and other services.

Property owners 1, Municipalities 0

In a major victory for property owners, a 2016 High Court decision held that procedure to be unconstitutional. And whilst the Constitutional Court on appeal said there was actually nothing unconstitutional about the legislation in question, it also confirmed that municipalities cannot use it to collect pre-transfer municipal debts from the new owner.

So how does that decision from our highest court affect you?

Buyers

You are no longer the “soft target” for municipalities and you no longer risk having to pay the seller’s historical debts; you are only liable for rates etc after you take transfer. The other side of the coin is that municipal debt write-offs generally are bound to increase, and those losses will be passed on to us all as consumers.

Sellers

To avoid delays in transfer, keep all municipal accounts up to date. Remember you cannot pass transfer without a “clearance certificate” certifying payment of rates etc due for the past 2 years. Debt older than 2 years cannot now be claimed from the buyer so expect municipalities to be extra vigilant from now on in collecting arrear rates and service accounts as they arise. Get legal help immediately if your municipality demands payment of debts older than 3 years – rates prescribe after 30 years, but other debts survive only 3 years.

Agents

This decision has been touted as positive for the property market generally and it certainly will reassure any potential buyers holding back from making offers for fear of having to pay huge hidden municipal debts.

Municipalities

“Historical debts”, said the Court, “exist only because municipalities have not recovered them”. Every municipality is obliged to –

• “Collect all money that is due and payable to it”,
• “Implement a credit control and debt collection policy”,
• “Send out regular accounts, develop a culture of payment, disconnect the supply of electricity and water in appropriate circumstances, and take appropriate steps to collect amounts due”, and
• “For the sake of service delivery … do everything reasonable to reduce amounts owing”.

You have, in the Court’s words “a full-plated panoply of mechanisms enabling efficient debt recovery” – use them to stop arrears building up in the first place.

“Crying wolf is a real danger” (David Attenborough)

POPI (the Protection of Personal Information Act) will provide welcome protection for our personal information – our names, ID numbers, addresses, medical histories and so on.

But the other side of the coin is that it will expose small businesses in particular to a whole new raft of onerous obligations and risks.

The problem is that there have been so many false alarms as to when POPI’s compliance provisions will actually commence, that many of us have lost sight of just how heavy a burden it will place on our businesses.

But now the process is strongly underway again, and this time it’s not a case of “Crying Wolf”. So here’s what you need to know for now ….

What is required of you and when

There’s a lot to contend with even for big businesses with their vast administrative resources and deep pockets. So since 2014 they’ve been planning ahead and spending fortunes on training for POPI and on preparing their systems for compliance.

But if you’re a typical small business with limited resources you face a real challenge here. You probably have very limited understanding of what POPI is, of how it impacts on you, of the substantial risks it exposes you to, and – perhaps most importantly – what you must do about it and when.

In a nutshell –

• At long last, an Information Regulator has been appointed, and Draft Regulations have been published for comment by 7 November 2017.
• So it seems logical that the one year grace period for compliance will run from early next year. So there’s no major panic just yet, but take advantage of this advance warning to understand your compliance burden and to get ready for it.
• One of your major obligations is to take appropriate and reasonable measures to secure all “personal information” collected, used or stored by you. Don’t think by the way that you don’t hold any “personal information” – pretty much every detail you have or have used for every client/customer, supplier, service provider, employee etc is included in the definition. POPI applies to you!
• You will have to officially report and explain any suspected breach of confidentiality. Not just a hack or data loss, but any potential data compromise such as the loss or theft of a laptop, cell phone or backup drive.
• You are also strictly limited as to what personal information you can collect, where you can acquire it from, what you can hold and for how long, and what you can use it for.
• Amongst a host of other issues you will have to tackle, you must ensure that the information you hold is accurate. The list goes on …

The big risks of non-compliance

• Breaches of any of these duties lay you open to severe penalties (administrative fines of up to R10m) and prosecution (up to 10 years imprisonment), quite apart from the harm and loss of trust in you that adverse publicity will undoubtedly cause.
• That’s not all – you can also be sued for millions in damages by anyone whose data has been compromised, and you are limited to a list of specified defences to such a claim. Critically, this is a case of “strict liability” in that no “intent or negligence” on your part need be proved.
• To give you an idea of the extent of the risk, an SME in the UK was recently fined under similar laws. It must pay £60k (R1m) for failing to prevent hackers from accessing its clients’ personal information.

We’ll let you have some practical guidance on complying once the Regulations (possibly also Codes of Conduct) and effective dates are finalised, but for starters your software, your business processes, and your security systems (passwords, encryption etc) will almost certainly need a major overhaul.

The best thing you can do right now is to start thinking about what personal information you hold, where you hold it, who has access to it, and how secure it is.

“Life is pleasant. Death is peaceful. It’s the transition that’s troublesome” (Isaac Asimov)

If you don’t want to be kept artificially alive – without your consent and perhaps in pain and distress – long after your medical condition becomes hopeless, you need to communicate your decision now to the doctors, hospitals and loved ones who will be caring for you at the end.

Incapacitation can strike without warning and at any time, so prioritise this whilst you are still mentally and physically competent to express your wishes.

Living Will v Advance Directive: What’s the difference?

Both are “advance health care directives”, expressions of your wishes for future care. Both become effective only when you lose the ability to communicate for yourself. They are a gift to your loved ones and medical carers, helping them to make the hard decisions they will need to make in order to spare you the nightmare of suffering while your life is pointlessly prolonged.

An Advance Directive differs from a Living Will in that it enables you, in addition to giving detailed instructions on what medical treatment you do and do not consent to in various scenarios, to also appoint a ‘Medical Proxy” (normally a close family member) who will make medical decisions for you. Appoint both a Primary and an Alternate proxy in case your Primary choice is unable or unwilling to act at the critical time.

Ask your doctor for guidance if you are unsure about what to do here, and for advice on the implications of the specific advance directions you are giving. You might for example decide that you want aggressive intervention in some eventualities but not in others.

Are these advance health care directives recognised by law?

We need to draw a clear distinction here. Euthanasia and “assisted suicide” are still generally unlawful in South Africa, quite apart from conflicting with many people’s moral/cultural/religious beliefs.

But whereas euthanasia and assisted suicide are said to involve an active intervention to terminate life, typical advance health care directives merely express your wish that when the time comes you be allowed to die naturally and with dignity, in other words that nature be allowed to take its course. We must all decide for ourselves the extent to which we are comfortable with that.

But will our courts recognise the legal enforceability of these directives? In 2016 the Supreme Court of Appeal, whilst finding that euthanasia and assisted suicide remain unlawful, made several comments that perhaps bode well for the acceptance of advance directives. So whilst their legal enforceability cannot be guaranteed until our courts rule specifically and definitively on the matter, the signs certainly seem more positive than negative.

In any event, in practice you will greatly increase the chances of your wishes being honoured at the end if you have confirmed beforehand with your loved ones and medical carers that they will do so.

You still need a “Will”!

Note that Living Wills and Advance Directives are very different to a “Last Will and Testament”, in which you provide for distribution of your assets to your heirs after you die. You need both.

In closing, and this is important …

1. Make sure that everyone knows how to find your Advance Directive or Living Will in a hurry. Ideally lodge signed originals with all the role-players.
2. Diarise to review your directions at least annually, and if you change your mind about anything, destroy all the old originals and replace them with new originals specifically revoking all previous directions.