Tuesday, 28 June 2011
Pay tax on Property Sales?
1. Capital Gains Tax. The lower rate and consequently first prize. But CGT only applies if the proceeds are "capital" in nature - that is, if you are realising a capital investment; or
2. Income Tax. Where you are held to have been "trading" in the land, the proceeds will be treated as revenue, and taxed as income. Generally a much higher effective rate than CGT, so very much second prize.
So - are you selling a capital asset or are you trading? In very broad terms, if you buy a property intending to hold it as an investment for an extended period of time, you are likely to pay CGT - whereas if you buy it for resale, you are likely to pay income tax.
However that's a very simplified view - the distinction can be a fine one indeed, there is much room for confusion, and every case will be different. Some of the factors likely to be relevant are: -
• How in practical terms have you dealt with the property?
• What is/was your intention in buying/holding/selling it, and has that intention changed?
• How long have you held the property? Note that - contrary to popular perception - this factor isn't in itself decisive, although it could well be relevant in showing what your intention in holding the property was.
A recent Supreme Court of Appeal decision confirms that, although your intention (and any subsequent change in intention) is relevant, the enquiry will go further. The court will also look at whether you are "actually trading, or carrying on a business, at the time of assessment" - a practical test with many pitfalls for the unwary.
The case in question related to the use of "asset realisation" companies, which have in the past been recommended to ensure that sale proceeds are treated as capital rather than as income. The SCA judgment has turned that advice on its head, the Court holding that the assets of realisation companies would be regarded as capital assets "only in special circumstances"; meaning that in most cases, using them may actually do more harm than good.
You may want to transfer your money internationally so contact a money transferring company or bank.
There's likely to be a lot at stake here (assessments of over R1.3m in the case in question!), and how you structure your property purchases and sales could be critical