Call for transfer-duty moratorium

In this series of articles, Cameron Kotze – the Tax Partner at Ernst and Young – discusses some topical tax issues for our readers.

MANY of us are aware that the Transfer Duty Act will be amended soon to impose transfer duty on the transfer of fixed property when the shares in a company or the members’ interest in a close corporation are transferred from one person to the other. This change in the transfer-duty legislation has come about because many of us make use of the existing legislation to avoid transfer duty when acquiring fixed property by acquiring the shares in a property-owning company or the members’ interest in a property-owning close corporation.Property advertisements often indicate that no transfer duty is payable because the owner of the property is a company or close corporation.The aim of the legislator when the original Transfer Duty Act was written was to collect a tax every time fixed property was transferred from one owner to the other.This tax was avoided with the transfer of the ownership of the shares in a company or members’ interest of a close corporation because, from a legal perspective, the shares in a company or members’ interest in a close corporation are transferred.Effectively, the ownership of the property was really transferred.Many residential properties and farms are therefore owned by companies or close corporations.The main driver for owning your property through a company or close corporation is to avoid (albeit legally) the transfer duty on change of ownership of the property.What many of us forget with the objective to avoid transfer duty is the other responsibilities that you have as shareholder of a company or member of a close corporation.In order for the company or close corporation to remain registered, an annual duty is payable.The annual payment is not significant (probably for most of us limited to N$80 annually) but many owners of companies or close corporations simply don’t pay the annual duty.In many cases the non-compliance is due to ignorance.Ignorance of the law is not a plausible reason for failure to comply with the law and you should not expect any mercy from the regulator of the law if you don’t comply with it.Once a company or close corporation is registered by the respective Registrars, they automatically become registered for income tax although these property-owning entities may never actually receive income from owning the property.All companies and close corporations are also regarded as provisional taxpayers even though they may never make a payment for tax.Many of these entities’ tax returns are not submitted to the Receiver of Revenue.The maintenance of property-owning companies and close corporations must have a significant cost implication for the Government, especially where they exist with the main aim of avoiding transfer duty.I cannot imagine what the real cost is of the paper that is involved in having a memorandum and articles for each property company or founding statement for each property close corporation and the annual tax forms for each entity – and all of this just avoid the transfer duty that should be there anyway, given the purpose of the legislation.Serious consideration should be given to allowing owners of properties (at least residential properties where no income is earned) to transfer the properties from these entities into their own names, where there is no effective change in ownership, without incurring a tax cost.This can be done by proclaiming a moratorium for a window period to give everyone time to make use of such an opportunity.Affording taxpayers this opportunity will certainly go a long way in simplifying the administration process of these entities from the authorities’ perspective and the public’s perspective.Should you not make use of this opportunity, transfer of the property out of the legal entity should thereafter be subject to transfer duty, even if there is no real effective change in ownership of the property.* Should readers have queries, they are invited to send them tocameron.kotze.za.ey.comThis change in the transfer-duty legislation has come about because many of us make use of the existing legislation to avoid transfer duty when acquiring fixed property by acquiring the shares in a property-owning company or the members’ interest in a property-owning close corporation.Property advertisements often indicate that no transfer duty is payable because the owner of the property is a company or close corporation.The aim of the legislator when the original Transfer Duty Act was written was to collect a tax every time fixed property was transferred from one owner to the other.This tax was avoided with the transfer of the ownership of the shares in a company or members’ interest of a close corporation because, from a legal perspective, the shares in a company or members’ interest in a close corporation are transferred.Effectively, the ownership of the property was really transferred.Many residential properties and farms are therefore owned by companies or close corporations.The main driver for owning your property through a company or close corporation is to avoid (albeit legally) the transfer duty on change of ownership of the property.What many of us forget with the objective to avoid transfer duty is the other responsibilities that you have as shareholder of a company or member of a close corporation.In order for the company or close corporation to remain registered, an annual duty is payable.The annual payment is not significant (probably for most of us limited to N$80 annually) but many owners of companies or close corporations simply don’t pay the annual duty.In many cases the non-compliance is due to ignorance.Ignorance of the law is not a plausible reason for failure to comply with the law and you should not expect any mercy from the regulator of the law if you don’t comply with it.Once a company or close corporation is registered by the respective Registrars, they automatically become registered for income tax although these property-owning entities may never actually receive income from owning the property.All companies and close corporations are also regarded as provisional taxpayers even though they may never make a payment for tax.Many of these entities’ tax returns are not submitted to the Receiver of Revenue.The maintenance of property-owning companies and close corporations must have a significant cost implication for the Government, especially where they exist with the main aim of avoiding transfer duty.I cannot imagine what the real cost is of the paper that is involved in having a memorandum and articles for each property company or founding statement for each property close corporation and the annual tax forms for each entity – and all of this just avoid the transfer duty that should be there anyway, given the purpose of the legislation.Serious consideration should be given to allowing owners of properties (at least residential properties where no income is earned) to transfer the properties from these entities into their own names, where there is no effective change in ownership, without incurring a tax cost.This can be done by proclaiming a moratorium for a window period to give everyone time to make use of such an opportunity.Affording taxpayers this opportunity will certainly go a long way in simplifying the administration process of these entities from the authorities’ perspective and the public’s perspective.Should you not make use of this opportunity, transfer of the property out of the legal entity should thereafter be subject to transfer duty, even if there is no real effective change in ownership of the property.* Should readers have queries, they are invited to send them tocameron.kotze.za.ey.com