Transfer duty: Valuation considerations

De Wet De VilliersLatest, Tax Tuesday

House (toy) and keysThe principles of transfer duty may seem straightforward, but there are some complex nuances. Let’s dig in.

What is it exactly?

Section 2(1) of the Transfer Duty Act[1] imposes transfer duty on the value of certain immovable property acquired by another person. In other words, when you buy a property, SARS may charge you transfer duty. Transfer duty does not apply to properties with a market value of less than R1 100 000.

This table shows the amount of transfer duty charged for property purchased in the 2024 tax year (1 March 2023 to 28 Feb 2024). You can find this table on the SARS website.

Value of the Property (R) Rate
0 – 1 100 000 0%
1 100 001 – 1 512 500 3% of the value above R1 100 000
1 512 501 – 2 117 500 R12 375 + 6% of the value above R1 512 500
2 117 501 – 2 722 500 R48 675 + 8% of the value above R2 117 500
2 722 501 – 12 100 000 R97 075 + 11% of the value above R2 722 500
12 100 001 and above R1 128 600 + 13% of the value exceeding R12 100 000

Can I avoid paying transfer duty?

The short answer is no.

At one point in the distant past, a common practice to avoid transfer duty was to form a company with your property as the asset, and sell the company rather than the property itself. In this way you could sell your property at a higher price, with the reasoning that the buyer wouldn’t have the additional cost of transfer duty. This is no longer the case.

The Act contains an anti-avoidance mechanism which ensures that transfer duty is also payable on the transfer of shares where the property is housed in a “residential property company”, as opposed to directly in a natural person’s hands.

However, there’s still a common belief that holding your property in a company reduces the amount of transfer duty charged. The common reasoning is that the value of shares in a company could be much lower than the value of the underlying property. For example, this will be the case where the company also has debts, loans or other mortgages.

Let’s use an oversimplified example to explain this better:

  • The value of a company’s property is R100
  • The company has liabilities to the value of R60
  • Resulting in the shares having a market value of R40

If the property was held by a natural person directly, as opposed to a company, transfer duty would only be payable on the R100 value.

But on what value will transfer duty be payable when company shares are transferred? The market value of the property (in our example the R100), or the market value of the shares (i.e. the R40)?

Section 5 of the Transfer Duty Act prescribes that transfer duty is payable on the following value:

  • Where consideration is payable by the person who has acquired the property (i.e. the seller wants something of value in return), the value is the amount of that consideration; and
  • Where no consideration is payable (your sugar daddy/mommy gives you the property), transfer duty is payable on the declared value of the property.

Fair value

Furthermore, the same section specifies that where the SARS Commissioner believes that the amount paid (or the declared value), is less than the fair value of the property, duty is payable on that fair value. Therefore, the fair value of the shares has to be established to ensure that the correct amount of duty is paid.

The definition of “fair value” in section 1 of the Transfer Duty Act notes that the fair market value of a share should be determined “without taking into account… any liability in respect of any loan…”.

And herein lies our answer: The fair value of the shares ignores the value of any debts in the company.

This ensures that transfer duty is paid on the value of the property itself, without artificially lowering the value of shares in a company through debt. So whether the property is held by a natural person or through a residential property company, both are given equal treatment in the valuation of their property.

[1] No. 40 of 1949 (“the Transfer Duty Act”). [Ed. If you’re interested in more of the but ifs, this article is worth reading]
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