A client recently wanted advice on a deed of sale pertaining to the sale of shares in a company that owned a house in Hermanus. He wanted clarity as to whether transfer duty was payable on the acquisition of the shares or not. He did not want any unsuspected costly surprises. To answer the question, one must understand the underlying concepts pertaining to transfer duty.
Transfer duty is a duty levied for the benefit of the National Revenue Fund on the value of any property acquired by any person by way of a transaction or in any other way, or on the amount by which the value of any property is enhanced by the renunciation of an interest or restriction upon the use or a disposal of that property. The value of the duty is determined by the Minister of Finance and is based on a sliding scale relative to the value of the property.
Property is defined in the Act to mean land in the Republic of South Africa and any fixtures thereon. It includes any real right to land, for example: a right of usufruct; any right to minerals and a lease of such right; a share or member interest in a residential property company; a contingent right to any residential property held by a discretionary trust. The acquisition which is a consequence of an agreement for consideration with respect to property held by that trust accompanied by any substitution of variation of the trust’s loan creditors or a substitution or addition of any mortgage bond or accompanied by the change of any trustees of that trust, and finally a share in a share block company.
Residential property is in turn defined as any dwelling-house, holiday home, apartment, or similar abode, as well as improved or unimproved land zoned for residential use in the RSA, including any real right thereto. Excluded from this definition is an apartment complex, hotel, guesthouse, or similar structure consisting of five or more units held by a person and used for renting to 5 or more persons, who are not connected persons, as defined in the Income Tax Act and finally, the fixed property of a vendor forming part of an enterprise as defined in the Value Added Tax Act.
A residential property company is a company that holds property that is residential property, or a contemplated contingent right held by a discretionary trust. In turn, it is qualified that the fair value of the property or contingent right must comprise more than 50% of the aggregate fair market value of all the assets of the company or trust.
Finally, a transaction in respect of land is defined as an agreement whereby one party agrees to sell, grant, waive, donate, exchange, lease, or otherwise dispose of the land to another person. Similarly, in relation to shares, an agreement whereby one party agrees to sell, waive, grant, donate, cede, exchange, issue, buy back, convert, cancel, or otherwise dispose of the shares to another party will constitute a transaction. In respect of a discretionary trust, the substitution or addition of any beneficiaries with a contingent right to any property of the trust, which constitutes residential property will also constitute a transaction or transfer.
It is therefore clear that the sale of shares constitutes a transaction. The company in question is a residential property company whose sole asset is the house, and therefore transfer duty will be payable and will be paid on the fair market value of the property/land.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)