BDO Spencer Steward: helping clients understand property transaction tax implications

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Acquiring property generally involves three types of transactions, namely property investment, development and trading. Di Seccombe, senior consultant at BDO Spencer Steward Cape, discusses the tax implications of each.

The general rule is that the capital or revenue nature of an amount received for the disposal of a property depends on the taxpayer's intention when acquiring the property. If a property is acquired with the intention of retaining it for use or holding it for return (for example to produce rental income), it will be a capital asset, but if it is acquired with the intention to resell at a profit, it will be trading stock (held on revenue account). A capital receipt from the disposal of property is taxed at a lower rate of tax than a revenue receipt.

A taxpayer who has a change of intention in respect of the property that he holds, will cause a different tax consequence to the one the taxpayer intended when he purchased the property. The most often cited change is that from holding a property with an “investment” intention, and changing that intention to a “profit-making” intention. This will result in the property no longer being viewed as capital asset in the hands of the taxpayer, but rather the property will now be regarded as trading stock. The taxpayer's change of intention will trigger both capital gains tax consequences, and result in a revenue receipt when the property is finally disposed of as trading stock.

A property investor
A property investor purchases property with the intention of receiving rental income. Ultimately this investor may hope for a capital gain when the property is eventually sold, but a potential gain is not the main intention behind the purchase of the property.

A property developer
A property developer buys property (for example land), develops it in one way or another (for example develops a complex of residential units), and then sells the developed property with the intention of making a profit. The developer will claim the cost of the property and the development expenses for tax purposes, and be taxed on a revenue receipt on the sale of the developed property. If the developer cannot dispose of the developed property due to market conditions, the developer may hold onto the developed property and earn rental income. The rental income was not the main benefit in mind when the property was purchased.

The property developer may be required to register as a vendor for value added tax (VAT) purposes, claim all VAT that he is entitled to, and levy VAT on the sale of the developed property. Should market conditions dictate that the developed property be rented out to earn residential rentals for an interim period, the change in use of the developed property from trading stock to a residential rental producing asset may cause a VAT liability in the hands of the developer.

Certain property developers utilise fractional ownership schemes as a vehicle to dispose of developed luxury properties at a cost to the purchaser which is less than buying the entire property. Fractional ownership often entails part ownership of a fraction of an entity which owns a property or a number of properties. Such ownership also usually implies either usage for a certain fraction of time in the property, or a split yield payout of the net rental income of the property. It is the opinion of the South African Revenue Services (SARS) that the supply of fractional ownership interests in a scheme where the objective is for the purchaser to acquire the use of fixed property constitutes a vatable supply and that a property developer, a property agent or any other vendor supplying fractional ownership interests in fixed property is liable to levy VAT and collect the VAT from the purchaser. Failure to charge VAT will result in the price charged for the supply being deemed to include VAT. Where fractional ownership interests in fixed property are supplied by persons who are not liable to register for VAT the supply will be subject to transfer duty.

A property trader

A property trader simply buys property at what he regards as a low price, hoping to sell it on at a profit without needing to improve the property much. There may be a need to clean it up a bit before putting it on the market, or perhaps even do some redecorating, but there will probably be no major work done on it. The receipt from the sale of the property will be regarded as a revenue receipt and thus the tax implication will be lower than if it were a capital receipt.