What do you pay Income Tax or CGT? (Crossing the Rubicon) Part 3 of 3
Wednesday, 15 April 2009
Having read the first two articles, you should now have a good understanding of the concept of “crossing the Rubicon”. In this article, I give several court case examples which dealt with the more intricate issues and helped to assess intention.
As we previously explained, the “Lydenberg” case stated that intention is the golden rule and hence, a court must look at the intention of the taxpayer when deciding the nature of a transaction. The moment the intention has changed, the taxpayer has “crossed the Rubicon” and the nature of the transaction changes.
Tax Deduction on Immovable Property - The New section 13
Wednesday, 15 April 2009
If you often read these articles, you will know that the old section 13(ter) has expired. Until recently, this was the only section which allowed owners of residential property, which was used for trade purposes, to get tax deductions on the cost of immovable property. This section was effectively repealed on 20 October 2008.
The good news is that there is a new section in place now which seems to be a lot better overall for owners of new, residential units. Section 13(six) effectively came into place on 21 October 2008.
Tax Deduction on Immovable Property - Section 13ter Repealed
Tuesday, 31 March 2009
Last year, we published an article regarding Section 13ter of the income tax act (Income tax act 58 of 1962) . At the time, this was the only section available to property investors that hold residential property. The section allowed investors to claim tax deductions in respect of the value of the property.
At the time, the section stated the following, in short:
A Taxpayer can deduct from their income, an allowance in respect of the cost of any residential unit which is part of a housing project. The deduction allowed is equal to:
Ten percent deductable in the first year five or more units are rented or occupied
Two percent in the first year and every year after that
The section was however very specific about the definitions of “housing project” and “residential unit”.
Housing project:
Had to be any project for the ERECTION of a building or several building in South Africa; consisting of at least five residential units.
Residential unit:
Any self contained unit of at least one room (excluding a hotel or hostel),
ERECTED after 1 April 1982 and as part of a housing project as defined above,
To be let out to a tenant for deriving profit or to be used by any “bona fide” employee of the taxpayer.
Basically, if you built the units and there were more than five of them, each being self contained and were renting them out; you could claim the tax deduction on the costs of the building. This was very good news for investors with lots of capital that were looking for rental income opportunities.
Unfortunately, there is now bad news.
As some may already know, the tax act is very subject to change. Section 13ter has been amended.
A very important concept to look at when investing is your cost of capital. All companies and investors need money in order to start or expand activities; this money comes at a price. Large companies usually have more complex structures, comprising of both funds generated through debt and issuing of equity instruments (such as shares or bonds).
However, the small property investor is usually only worried about two facets: the original capital invested in the company and any bonds applicable to the property. This cost is therefore easy to calculate. If you have a bond against an investment property of 15% per year, the cost is 15%.
The property market in South Africa is full of foreign real estate investors (especially in Cape Town); should you be one of these real estate investors, you might find yourself confused as to how to manage your tax affairs.
Also local property investors that are selling their properties for a foreign resident should know about some new tax obligations that SARS decided to place on the seller. We have discussed this in the first article, please read this is you haven't yet.
The tax system in South Africa is a source based system; this means that, by definition, all income from a source in South Africa will be taxed in accordance with South African Tax Law, but it is not that simple.
What do you pay Income Tax or CGT? (Crossing the Rubicon) Part 2 of 3
Tuesday, 31 March 2009
By: Theo Dinculescu
My last article concentrated on the principle of “Crossing the Rubicon”. In this article, I will apply the concept in a property market perspective. In the property market, this tax principal is applicable when determining whether your property is a capital purchase; in a buy-to-let or a long-term purchase; and hence subject to only CGT upon sale.
To Understand “Capital Vs Revenue” purchases, one must first understand one basic principle. The “Fruit and Tree” principle is most important. The capital asset is the tree; it is kept in order to obtain the fruit and not sold in the short term.
If you have established yourself to be a non-resident, we now have to determine what income you will be taxed on. As I discussed in the previous article, all income which is from a South African Source, or deemed to be from a South African Source, will be taxed in accordance with the South African tax law.
Obviously, all income which is physically earned within South Africa will be a South African source. Here are some straight forward, common income sources:
What do you pay? Income Tax or CGT (Crossing the Rubicon) Part 1 of 3
Thursday, 26 February 2009
By: Theo Dinculescu
Many property investors are buying property and finding themselves having to sell the property in a relatively short amount of time. The question that arises at this point is will they have to pay income tax on the sale or will they have to pay CGT?
The answer to this question falls under the terms “Crossing the Rubicon”. However, many investors do not understand this term nor how it works.
In this article we will try to demystify this term for better understanding.
What does “Crossing the Rubicon” mean; where does this term come from?
Historically, this concept or expression is used when a person gives a clear sign of change in intention; once you have crossed the point of no return; the point where your intention has been clearly shown through your actions.
Before reading this article, make sure you have read and understood the previous articles on allowances and recoupments.
Capital gains tax was introduced on 1 October 2001. This tax is levied on the disposal of any asset on or after 1 October 2001. CGT is very complex. I will be discussing the basics in this article.
How do we calculate it?
Before we can calculate CGT, we must first discuss the amounts that make up a CGT calculation. These amounts are:
Proceeds, Base cost.
Proceeds: (definition set out in schedule 8 Par 35-43)
Proceeds are made up of any considerations received in exchange for the asset. This could include the discharge of a debt by the buyer on behalf of the seller, or, if assets are exchanged, the market value of the asset received. The most common one is obviously cash.
Proceeds exclude any amounts which are already included in gross income in respect of that asset, such as recoupments on a sale. As you can remember, we include the recoupment in income and we are taxed on it. This avoids double taxation of amounts.
Base Cost:
The base cost of an asset is the original cost to the taxpayer less any amounts which were excluded from gross income in respect of the asset or its disposal. For example any allowances claimed in the past and any scrapping allowance on the sale.
Before selling an asset, it is wise to consider the tax implications of the sale. Such tax implications are not only important at the time of sale but also important in considering the value of a property according to its related cash flows before you actually buy a property.
A recoupment is one of these considerations. To understand recoupments you must understand what the tax base of an asset is. As you remember, we are allowed to expense a part of an asset for tax purposes every year, these are allowances. The original cost of an asset, less any allowances claimed to date is the tax base of an asset. So: if we have an asset with a cost of 220,000 and we have claimed, as a deduction from taxable income, 140,000 in allowances, to date; the tax base of the asset would be 80,000.
Capital gains tax was introduced on 1 October 2001. This tax is levied on the disposal of any asset on or after 1 October 2001. C.G.T is very complex. I will be discussing the basics in this article.
How do we calculate it?
Before we can calculate C.G.T, we must first discuss the amounts that make up a C.G.T calculation.
In property investing just like in any business tax can get complicated. It is not really that hard, However some things can get confusing. One of the more confusing things is the difference between depreciation and an allowance.
This article was written to try and bring more clarity to these two terms.
Recently on PIN Forum there has been a discussion about “round trip financing” and the dangers related to this. If you wish to read the thread before you read this article it can be found here .
As a general summary, the problem for investors is when the start moving around money between people that are the same, or in other words connected persons and /or entities.
This falls under some heavy issues discussed in that thread about “round trip financing” with no commercial substance and much more. Section 80 of the income tax act no 58 of 1962 says in detail what a tax avoidance agreement is. The act deals with sections such as lack of commercial substance and round trip financing, both of which are clearly identifiable in this cases of connected persons.
In several of my articles I will be discussing special rules for connected persons. I therefore feel it is important to mention what a connected person is, for tax purposes.
The act separates connected persons in relation to individuals, companies, members of partnerships and trusts.
Taxed Bonuses for Property Investors and Landlords - Part 2
Wednesday, 14 May 2008
Section 11(h): Relief for the landlord
This is a highly complicated section.
The first important point to mention is that these deductions do not apply in the following two circumstances:
If either the landlord or the tenant is a company and the other
party owns more than 50% thereof. I.E: Party “A” is an individual
(could also be a company) and it rents out a building to party “B”
which is a company. If “A” owns more than 50% of “B” then any premiums
or improvements made by “B” will not be exempt in any way from the
gross income of “A”.
Also, if “A” and “B” are both companies and a third party owns more than 50% of both of them, there will be no deductions.
Both in property investing and letting, investors need to understand some basics about taxes. These are not complex concepts, but they are concepts that help investors better understand, from a tax perspective, the working of accounting.
One of the more confusing issues, are allowances and depreciations. That is why it was our first article. This is the second article in this series.
When a company spends money on expenses, these expenses are deductible for tax purposes as business expenses. So, what happens when expenditure is of a capital nature and the amount spent cannot be expensed for tax purposes? Such amounts qualify for capital allowance deductions.
Section 13 Tax Allowances in respect of Residential Buildings
Tuesday, 15 April 2008
Most investors know that in South Africa, as opposed to other countries like the US, property investors cannot depreciate residential buildings. We all know that some changes have been made to allow depreciation on commercial buildings but residential buildings according to tax law doesn’t have many options. As you noticed, I said many options, there is though one option in the law that is somewhat constrictive, but which may still be a viable option for buy to let investors. That statement needs a minor correction, in this article we will be referring to a new term “develop-to-let”. Hang on a bit here and we will explain everything.
We found that there is an allowance in the tax law that enables property investors to depreciate a building and before we wrote this article we went out to investigate the information and give you some examples of how you can depreciate a residential building and in what conditions. So here goes…
