Tax shocker for wealthy property investors

If you’ve sold properties that have been tucked in trusts, expect a hefty surprise penalty.

That’s the upshot of a recent Johannesburg Special Tax court judgment, set to hammer wealthy people who have used family trusts to acquire expensive property.

Paul Ferreira, new tax expert at Maitland in Johannesburg, told Realestateweb on Monday the latest judgment could get the tax collectors “dusting off” old letters and demanding transfer duty on property sales.“For years wealthy people have been wont to acquire their expensive residential properties in family trusts for various reasons, including estate planning and tax planning. 

Prior to 2002, when the law changed, in some cases the trust, rather than the trust’s property, was ‘sold’ with the object of avoiding transfer duty, which could be as high as 10%,” said Ferreira.

Explaining how rich people manoeuvre around transfer duty, he said: “Assume the trust held residential property as its only or principal asset, which it had agreed to sell to A, an unrelated party. The acquisition of the property by A would be subject to transfer duty, payable before the transfer of the property. 

“However, to avoid the duty the trustees of the trust and its beneficiaries were changed to persons nominated by A and, after payment of the trust creditors, the balance of the purchase price was paid to the trust beneficiaries.  Frequently the ‘purchase price’ was funded with borrowings secured by a mortgage bond over the trust’s property,” he said.

Ferreira pointed out that the advantages of these steps included a higher sale price for the seller or an affordable or lower acquisition cost for the buyer. Some estate agents and tax advisers considered this a safe way of avoiding transfer duty, he said.

“However, the Receiver, upon learning of this, took a different view and sent out standard form letters to some of the trusts concerned demanding payment of transfer duty.  Mostly these letters were either ignored or replied to denying liability for the duty.”

“The Receiver apparently then went silent - save for a 2002 amendment to the Transfer Duty Act, which effectively plugged the loophole. But on 26 October 2007 the Johannesburg Special Tax Court delivered judgment holding that a 1998 ‘sale of a trust’ did result in a transfer duty liability, and upheld an assessment on the trust concerned for transfer duty and, in addition, a penalty of some 42% of the transfer duty.”

Ferreira added that “it seems likely that the Receiver now will be dusting off those old letters, and that there may be some worried residential property trusts that were ‘sold’ before 2002 without the payment of transfer duty”. 

He said the penalty for the late payment of transfer duty is 10% a year. 

* For more details on tax and property, visit Realestateweb’s sister site, Moneywebtax.co.za.

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responses to this article

EEEeeek Time to be a tax exile. by RJ on November 19 2007, 20:12 Find this comment inappropriate? Report it

Yep - tax exile is the only wat to to go if you can swing it. As the saying goes "There would not be tax havens if there were no tax hells!" by Tax exile on November 20 2007, 13:42 Find this comment inappropriate? Report it

'Bout time The wealthy get away with everything. Maybe not this time? by Bitter poor ou' on November 19 2007, 20:30 Find this comment inappropriate? Report it

not all are equal - if you can afford a lawyer. by Gungets Tuft on November 20 2007, 03:51 Find this comment inappropriate? Report it

to the Author: what about CC's? What happens in the case of the same thing happening but with a CC. Therefore if I bought a CC in which a property was registerred. I have not paid any transfer duty, will I now also be in trouble? by Pinvestor on November 20 2007, 07:02 Find this comment inappropriate? Report it

CC Did you pay VAT? by Foxman on November 20 2007, 09:51 Find this comment inappropriate? Report it

To Foxman No I did not pay vat or any other related form of tax. by Pivestor on November 20 2007, 10:32 Find this comment inappropriate? Report it

Ownership change of any entity with a property as only asset will attract tax by ea on November 20 2007, 09:50 Find this comment inappropriate? Report it

How will this effect the Treoc crowd ? I know they get up to all sorts of devious trust schemes. by CJ says on November 20 2007, 10:04 Find this comment inappropriate? Report it

devious trust schemes? devious trust schemes hey CJ, you had to add that little adjective in there for a bit of spice, you sad W***** by Mike on November 20 2007, 22:26 Find this comment inappropriate? Report it

sounded pretty devious to me ... People on this site have boasted that they don't fear a crash because they can walk away from their properties unharmed with no financial loss because of the multiple trust system they had set up ... sounded pretty devious to me. It also sounded like the . .more banks would end up holding the baby if a crash happened ... a local 'sub prime crisis' equivalent in the making perhaps ? I seem to recall it was something like this - you buy a bunch of properties in a trust, any equity increase is taken out by refinancing and stashed in an untouchable family trust. If a crash happens then the first trust can go bankrupt and you are personally unaffected as are all the previous gains stashed away in the family trust - so the bank is left holding the problem. And apparently there are tens of thousands of these things ... sounds very iffy to me and extremely dangerous for the banks. 20,000 houses with say a R300,000 loss each - that's a 6 billion rand hit to start with. Northern Rock the sequel perhaps. It appears I seem to have touched a nerve here ... you are obviously involved so maybe you care to share your insider knowledge with us ? . .less by CJ says on November 21 2007, 00:12 Find this comment inappropriate? Report it

Treoc and Trusts reply Dear CJ, I suggest you enquire as to what we actually do. This article does not deal with any new issues, it is merely a court ruling confirming a previous legislative amendment. This ruling has absolutely no bearing as to what we do at Treoc, it applies . .more to schemes entered into retrospectively, and possibly some poorly advised people or delinquents going forward. The Attorneys who advise Treoc on their trust structures for many years, were of the opinion that you can not "sell" a trust, so none of their clients will ever be affected by this ruling which was promulgated in December 2002. Nor is Treoc affected going forward as we do not advise on schemes. I am interested to hear what has led you to believe that Treoc gets up to devious schemes, we take exception to that as all advices and services are rendered and advice given by experts in their respective fields and in strict accordance with all laws including the Income Tax Act. . .less by Jose on November 21 2007, 19:23 Find this comment inappropriate? Report it

A question for Jose Thanks for the reply Jose. Is it true what your clients have told us i.e if a crash should happen and lets say all my properties in my Treoc arranged trust go into serious negative equity and lets also say interest rates have gone up and I am losing . .more money, then I can declare the trust bankrupt and walk away with no financial pain to myself ... and furthermore, the equity that I removed earlier by refinancing and conveniently stashed away into a Treoc arranged family trust also remains untouched. In other words, the bank is left with the problem and I walk away with the spoils from the good years. . .less by CJ says on November 21 2007, 23:16 Find this comment inappropriate? Report it

Oh dear - no say from Jose by CJ says on November 22 2007, 16:49 Find this comment inappropriate? Report it

trusts Yes it's true, which is exactly how the game is played. The banks know these rules, which is exactly why they decide how much you can refinance and how much surety you will sign. They look after themselves, you look after yourself. Good business practice. . .more This must be the first time that someone worries about the poor bank . .less by Joezay on November 23 2007, 10:08 Find this comment inappropriate? Report it

Now the UK tax payer is 22 Billion quid out of pocket to prop them up by CJ says no one worried about Northern Rock on November 23 2007, 11:22 Find this comment inappropriate? Report it

Banks are not idiots If there is not suffcient income in the trust the bank will request you to sign surety. While you may think that your assets are protected in the trust there are circumstances where the trust veil will be set aside. Also you will be personally . .more sequestarted and your income over and above yor needs can be used to pay debt so not 100% secure . .less by NOT TRUE on November 26 2007, 10:43 Find this comment inappropriate? Report it

A question for Jose Dear CJ Do not have teh luxury of time I am afraid. I implore you to acquaint yourself with the fundamntals of the factors that resulted in the sub prime and Northern Rock disasters. In a nutshell if you provide funding to an . .more individual or trust or company to acquire a property or asset, and if that funding is greater than the value of the property or asset you are sooner or later going to get into a fix. Simple maths! If you peruse Joezay's post, very simply in sunny RSA, the banks and lenders will never lend you more money than the value of the asset/property. Therefore the value of the asset will never be more than the loan or mortgage. At Treoc we advise our members to invest in a very one dimensional fashion, namely entry level property, for a number of compelling reasons (of course one can earn good returns from a number of other classes of assets or property for that matter) we choose the least risky and most sustainable class being entry level property. If anything the sub-prime crisis has confrimed that buy-to-let property is the least risky property assets class due to the need and demand for such property and that the owner is not solely responsible for paying the mortgage. The tennant being a major contributor. Lastly your query re bankruptcy, it is purely logical business sense. I want to juxtapose your comment with a very normal business arrangment. You start up a business, you make millions, at some point the market turns and the business is liquidated and you are unable to repay your overdraft, do you repay the bank all of your profits?? All information is neutral, if any one has delinquent inclinations or tendendcies they will be caught up with a number of statutes, the Insolvency Act, the Criminal procedure act etc. We advise people to take care when out there doing buisiness, whether you are investing in property or conducting a business. All parties are aware of their risks. I believe we are adding value by levelling the playing fields between the big banks and corporates who have all the time, money and experts a their disposal versus the man in the street. Trust that gives you an idea of where we are coming from. Regards Jose . .less by Jose on November 23 2007, 17:18 Find this comment inappropriate? Report it

I find it all to be rather smelly Thanks for the reply - I have a few problems ... if you have a 100% bond and the property drops in value 20%, your bond is more than the value of the house, something you say is not possible but obviously it is in a crash. When a house goes up . .more in value and you remove equity by refinancing, you are not removing profits, you are taking out a loan against that property. You say that if that property drops in place to an extent that you no longer want to keep it, then it is OK to walk away and leave the bank to take the pain even though you are still holding the money the bank loaned out to you in cash. There is something very wrong here - let me get this right - you buy a 300,000 house, it goes up to 600,000, you borrow 300,000 against the equity and stash it in your family trust, a crash happens and the house falls back to 300,000 - it looks like it will take years to go up beyond 600,000 again and the rent is not covering the bond so you walk away and declare the trust bankrupt, the bank loses 300,000 and even though you still have the 300,000 it loaned to you, it has no claim on that money ... in other words you take the profits if the property goes up but if it goes down the bank takes the loss ... and this is legal !!! Do the banks know what is going on ? Who are these banks ? I need to know because I sure as hell don't want to hold any of their shares if they are happy with this arrangement. Are our banks realy this stupid to allow this ? This is even stupider than lending subprime loans. Any bankers out there who wish to put the banks side to what sounds like a very dodgy set up. Apparently some of these Treoc guys have hundreds of homes in these trusts all maxed out with 100% bonds - come a crash they are going to go under and the bank is stuck with huge losses. If anyone wondered why there has been such speculative fever going on in the under 600,000 market, look no further than our Treoc friends here who are speculating with the banks money, driving the prices up whilst letting the banks take all the risk. Am I the onlty one around here to find this all rather smelly ? I would like to see one of the financial journalists to do an investigation into what is going on here. Bruce Cameron?Noseweek ? Any takers ? . .less by CJ says on November 23 2007, 23:03 Find this comment inappropriate? Report it

CJ reply Dear Cj I re-iterate my comment, enquire as to what we do, secondly acquaint yourself with the fundamentals suurounding the sub-prime crisis. Lastly you make some assumptions that are unsubstantiated, it is likely that the market . .more will slow, but highly unlikely that it will drop to below what you owe. You also assume 100% mortgages all the time? Where did you get that info? Please stop the sensationalism and investigate the facts. This is not a methodolgy to leave any person or institution holding the baby, it is a long term, 20 year plus plan, carefully planned using technical software and based on proper cash flow planning and responsible borrowing. Regards Jose . .less by jose on November 26 2007, 10:47 Find this comment inappropriate? Report it

Northern Rock also had a 20 yr plan I understand the sub prime fundamentals - easy borrowing by greedy banks who thought by passing the risk to others they were immune to harm. I am sure Northern Rock had "a long term, 20 year plus plan, carefully planned using technical . .more software and based on proper cash flow planning and responsible borrowing." Funny how these things don't work out quite as planned. Nothing like a good old fashioned crash to rock the boat a bit. We have just had the biggest boom in a century and a serious crash and global recession is now going to be the payback. Your clients need to be prepared for interest rates to go several percentage points higher and for house prices to keep drop for at least 6 years down to about 20% less ... the question is can they carry that without pain ? Can they go up to a decade making loses and no equity growth ? You want me to acquaint myself with the facts so you tell me if they can. Show me a buy-to-let who doesn't go for 100% bond. It may be harder now with the credit crunch but in the past it was normal. If this is all so safe and responsible, why put everything into trusts ? If the banks are going along with this then their reasoning must be like yours - "there won't be a crash so we are safe"- it is such reasoning that has got the global financial institutions in the mess they are in at the moment. If you are so happy that your system is above board and responsible, educate us by putting an outline of how it works on realestateweb - give us the overall picture of how the scheme works with the 3 trusts etc and let us debate it. . .less by CJ says on November 26 2007, 14:32 Find this comment inappropriate? Report it

Final reply to CJ Dear CJ Again you merely make and raise very general comments and make sweeping unsubstantiated statements, which are also mentioned in isolation to other markert factors that will have certain counter effects. I will attempt to . .more answer as many of your queries as possible, for the remainder I suggest you attend one of our seminars, where the issues are raised and debated. Firstly, you again show that you do not understand what led to the sub-prime crisis, whilst there is huge greed involved by the banks, the crux of the matter is you can not lend to the unbankable and loan more to them than their property is worth, devising easy repayment schemes at the initiation of the mortgage and then altering the repayment terms and rates after a few years. The initiators of the schemes then on sold these products to unsuspecting and sometimes aware fund managers, pensions etc on the back of good ratings by the rating agencies. Northern Rock was advancing up to 125% of the value of the property, this creates artifical price increases and is non-sensical and unsustainable in the long run if there is no growth in house prices, simple. A local bank will not re-advance further funds unless the property has increased in value and the borrower aided by surety is able to meet the mortgage payments, two radically different scenarios. If property prices slow down you hold an wait the cycle out. Money can be made in any cycle of property. Re the ability to carry losses for a long time, how about fixing your rate for a period of years, 20 year products are in the market. We always build in a buffer of a few percentage points in any event to ensure cash flow is not strained, if the rates move and we expect them to continue rising, then we fix, many members done so on our advices more than 18 months ago. If there are less buyers there also more tenants in the market, a fact you omit to take into account. There are very different dyanmics driving the South African market. We carefully select what type of properties we purchase, entry level townhouses, there is always a demand for the letting of these properties, particularly when the are less buyers, this is the first port of call. So it all boils down to planning, as you state no-one has a crystal ball to foresee the future. Any other asset class is in the same boat as far as predictions and projections are concerned. I will go so far as to state that we are more comfortable in investing in one of the basic human needs which is shelter, which trails only food and clothing as a need. Re the 100% mortgage, whilst many start out at that loan to value ratio, it soon decreases, which is something we advise. Re the trusts, ignoring the protection that is afforded by these structures, I will list some other benefits such as estate planning, CGT savings, estate duty savings, no executors fees on death, leaving a legacy, no need to transfer assets on death, property portfolio contnues and need not be liquidated n death, access to assets by spouse, dependents etc. Safe guarding minors and the list goes on. Re the Banks, it is a simple mortgage transaction, using the same crtiteria that they apply to someone such as yourself CJ when applying for a bond. There is no question of boom or bust, merely is there sufficient collateral in the property and the borrowers affordability. The methodoly and trust structures are comprehensively covered in a one day seminar and can not be transcribed here, as suggested see you at a seminar. Regards Jose . .less by Jose on November 26 2007, 15:57 Find this comment inappropriate? Report it

A glorified Ponzi scheme ? Let's see in 6 years This would be the R3000+ seminar with another R3000 or so for the software and another few grand for each of the trusts ... there's a lot of money to be made selling shovels ... a heck of lot more than there is looking for gold in the bubble priced . .more housing market. So you buy your R500,000 security estate house in a down market area - there's no way your rent is going to cover your bond - interest rates go up and you are probably losing 3 grand a month after expenses. The bubble bursts and prices fall 20% - you need to find R100,000 to keep the bank happy whilst still having to find R36,000 a year to cover the shortfall. You bought 3 houses cos the nice people at the course said you will become rich quick. 3 years later you are R600,000 in debt - you sell your houses in desperation and probably walk away R700,000 out of pocket - hopefully the trusts can kick in and you can get the banks to take some of the pain. You wish you could put the rents up but the recession from the collapsing house market and global financial instability has meant people just don't have the money. I am sure in boom times your scheme works really great - in crash times I have serious reservations. Let's talk in 6 years time, then we will know whether you are crash proof or not. It seems to me you are a glorified pyramid scheme - you need that fresh blood to come in and keep the market moving up - when the market dries and prices drop you are in trouble. . .less by CJ says on November 26 2007, 21:49 Find this comment inappropriate? Report it

Don't always agree with CJ, but this time I do. Bruce has already written and article abou Treco, but not from this angle. As stated in a previous post, the issue of surety comes into play here and even if your assests are safe WILL . .more lose your income, as income over and above your needs can be used to settle debts. This means that the income from your property investments can never be your, but will have to remain in the trust. . .less by I agree with CJ on November 26 2007, 10:48 Find this comment inappropriate? Report it

aiaaaaaaaaaaa by anonymous on November 20 2007, 10:56 Find this comment inappropriate? Report it

No longer see Treoc adverts - is the Buy to sell market shrinking? by gary on November 20 2007, 11:13 Find this comment inappropriate? Report it

REAL ISSUE Is that transfer duty is too high. Its easy money for the ANC gang! by SAM on November 20 2007, 12:14 Find this comment inappropriate? Report it

To bitter poor ou - we are all poorer if we don't encourage the people who can afford to engage in these shenanigans to stay in South Africa. It is invariably they who have the chutzpah to create wealth where there was none before. Tax them too effectively, restrospectively and harshly and the only . .more people who lose are those left behind. . .less by anonymous on November 20 2007, 16:43 Find this comment inappropriate? Report it

thanks but a little tax efficiency would be nice by Poor ou on November 20 2007, 17:32 Find this comment inappropriate? Report it

Not true Very few countries are willing to pay host to parasites these days. Let them leave if they want! by Seppy on November 20 2007, 19:58 Find this comment inappropriate? Report it

You are not quite right... How are they (the rich and wealthy) parasitic if they contribute an estimated 80% of the tax revenue? If tax is a redistribution of income from the rich to the poor, who are the parasites? Think carefully, . .more the answer isn’t as simple as some may think… If you send the rich packing because they exercise their right to tax planning (Duke of Westminster), what will happen to their “share” of the aforementioned 80%? Just my thoughts… . .less by anonymous on November 21 2007, 10:37 Find this comment inappropriate? Report it

Absolute nonsense You are talking through your cakehole! It is a well known fact that the middle classes contribute the vast bulk of tax receipts. You are dreaming if you think that the rich contribute 80% of tax. The middle classes also create most of the small . .more businesses that employ the bulk of workers. I say, get rid of the parasites and let them do the tax planning in some other country. . .less by Seppy on November 21 2007, 10:54 Find this comment inappropriate? Report it

Trust Transfer Duty Decision We have been advising our clients to look carefully when registering property in a trust. The disadvantages may well out way the advantages for the average person. Tranfer duty into a trust is higher as is capital gains tax when selling. It might well be . .more better to own property in your own name. You need good advice from somebody who does not what he has been doing. Nobody should cry about this decision. It has been pointed out to our clients for years that this is in effect a transfer of property and that tranfer duty should in reality have been paid. At least the uncertaincy has been removed. My best advice is to make sure your motivation for using a Trust is the right one. Mike Spencer Platinum Global Bloemfontein . .less by Mike Spencer Platinum Global on November 21 2007, 09:52 Find this comment inappropriate? Report it

Look at the facts Once again the shocker is not so much of a shcoker. If you look at the facts of the case the transaction was clearly intended to dodge tax and SARS takes a dim view of this. Mr X offered to buy the property in his own name. This transaction . .more was cancelled and a new offer concluded to pay off the loan accounts and substitute the trustees and beneficiaries. In fact if yoo read the extract from the court case: "This explanatory memorandum recognised that where properties were held in companies or trusts, a change in the shareholding or beneficiaries did not give rise to the payment of transfer duty. Thus, the definitions referred to above were amended to include for example the following:" you may find that transfer duty will not be levied in every situation. . .less by Tax Guy on November 21 2007, 12:09 Find this comment inappropriate? Report it

Look at the facts While TAX GUY is correct. I think that the receiver will find it very easy to infer that if you simply changed the trustees and beneficiaries of a property owning trust AND paid money to others to do so then it can only be inferred that you obtained . .more control of the property in this way to save the cost of tranferring the property to a new owner/entity ie did not have to pay tranfer costs. In fact it was for this very reason that most people registered their properties in trusts in the first place! It would be very difficult to argue that this was not the main benefit of having "bought" the trust. . .less by Mike Spencer on November 21 2007, 12:22 Find this comment inappropriate? Report it

What real reason would there be other than dodging taxes - The use of a trust. Any other reason than dodging tax? by Question for tax guy on November 21 2007, 16:18 Find this comment inappropriate? Report it

Estate planning. by anonymous on November 22 2007, 07:08 Find this comment inappropriate? Report it

Tax Dodge A trust should be used for Estate Planning (Legititmate) and also for assest protection against creditors by Tax Guy on November 22 2007, 11:33 Find this comment inappropriate? Report it

So, let me see dodging tax and dodging those you owe money. So the rich get away with it by using trusts, and the rest get bad credit records and tax penalties. by anonymous on November 22 2007, 17:53 Find this comment inappropriate? Report it

That is how it is. The rules are not secrets. Just substiture "rich" with "those who make a point of understanding how things work and being responsible about their finances" in your sentence, and even you might hear the penny drop by Joezay on November 23 2007, 10:16 Find this comment inappropriate? Report it

Aurélio Guapo Aurélio Guapo Entrepreneur in Portugal, seeking strong personalities or groups in the world who want to invest Building projects (Real Estate) in Portugal (Algarve, Lisbon). aguapo.investportugal@gmail.com . .more Regards, Aurélio Guapo . .less by Aurélio Guapo on July 29 2009, 19:11 Find this comment inappropriate? Report it

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