Special Edition - Budget 2011

Budget 2011 - Some relief for property investors

Some of the main aspects of the budget speech that could impact investors and home owners are summarised below: 

Transfer duty

The budget speech contains some relief for investors and home owners.

The most important change for property investors is that transfer duty rates have been standardised. Individuals and legal persons ( CC’s, companies and trusts) will now be subject to the same transfer duty on acquisition. This could represent major savings for investors using legal persons as their holding structures. A number of clients are already using trusts to acquire properties, and this could mean that more clients would consider this option, despite higher CGT rates on disposal.

Although this would still represent a cost, it would also make it cheaper for clients wishing to restructure their holdings by moving their property assets into CC’s, companies or trusts.

To date, legal persons paid a flat rate of 8% of the purchase price of the property, regardless of the price of the property. Individuals paid no transfer duty up to R500,000, 5% between R500,001 and R1m, and 8% over R1m.

The new, standardised, rates are:

The transfer duty rates will apply to all purchase agreements entered into on 23 February 2011 and thereafter. It is envisaged that some buyers will approach sellers to tear up contracts entered into before this date in order to sign new contracts. This would be illegal as it would deprive the fiscus of income.

The raising of the threshold from R500,000 to R600,000, dropping of the percentage between R600,001 and R1m from 5% to 3%, and increasing the amount from which the 8% rate will be applicable from R1m to R1.5m, is designed to promote home ownership and to partially address the affordability of housing. It is expected to cost the fiscus R750m, and will provide some stimulus to the property market. It will especially assist first time home buyers, who are already benefitting from some relaxation in bank’s lending criteria, which some obtaining 100% loans at competitive interest rates.

The minimum saving will be R5,000 for a R600,000 property. The transfer duty on a R1m property will drop from R25,000 to R12,000, a R13,000 saving (52%). The saving in respect of properties bought for R1.5m and above will be R28,000 (at R1.5m, it represents a saving of 43.1%).

The savings for legal persons, and hence some investors, will be even more pronounced. Previously, a property bought by a legal person for R1m, would have attracted transfer duty of R80,000. Now, the transfer duty will be only R12,000, a substantial reduction of R68,000 (85%). The transfer duty payable by a legal person on a R1.5m property will drop from R120,000 to R37,000, a saving of R83,000 (69%).

Value-added tax

A notional VAT input credit may be claimed when a VAT vendor buys a fixed property from a non-VAT vendor. To combat abuse, this notional VAT input is currently limited to the transfer duty paid by the purchasing VAT vendor. It is proposed that the notional VAT input credit be delinked from the transfer duty payable, and that the quantum of the notional VAT input credit is set equal to the tax fraction (14/114) of the lower of the: 

• Selling price (consideration) payable for the property  
• Open-market value of the property 
• Current municipal value of the property
• VAT-inclusive acquisition price, including improvements, by the non-vendor selling the property

Financial sector

Within the context of promoting a stable financial services sector that is accessible to all, the Financial Sector Charter will be reviewed to ensure greater accessibility by all.

Housing and community amenities

Building adequate and safe human settlements raises living standards and creates new job opportunities. Realising this outcome will require speeding up service delivery, eliminating regular patterns of underspending in certain provinces, and improving the efficiency of local government housing processes.

With an additional R6.1 billion allocated over the medium term, planned expenditure on housing and community amenities increases from R102.1 billion in 2010/11 to R138.4 billion in 2013/14. The largest component in this function is community development, which makes up 47.4 per cent of expenditure in 2011/12. Transfers to provincial and local government include earmarked grants for the delivery of housing, water, sanitation and electricity to households.

Property developers

A tax incentive for developers to increase the supply of affordable housing below R300,000 will be investigated.