Is Transfer Duty Calculated On Fair Market Value Of The Property Or On The Selling Price?
Category Buying and Selling Property
In most instances a property is sold at its current market value, but in an ever-unpredictable property market, it sometimes happen that a property gets sold for much less. This begs the question on what amount will transfer duty be calculated?
Section 2 of the Transfer Duty Act, 40 of 1949 (hereinafter the Act) allows for the levying of transfer duty on the value of any property, which value shall be determined in accordance with the provisions of Section 5 of the Act.
Section 5(1) of the Act then states that the value on which transfer duty will be payable will the "consideration amount", meaning the selling price, as agreed between the parties. The position therefore seems very clear; transfer duty is calculated on the selling price, but it is important to look at Section 5(6).
Section 5(6) reads that if SARS is of the opinion that the consideration amount as per the agreement of sale, is less than the fair value of the property, SARS may determine the fair value of that property and transfer duty will be calculated and payable on this amount. SARS generally uses the municipal value of the property, which is a controversial topic on its own.
According to Annetjie Coetsee of STBB Attorneys, it is therefore evident that SARS can raise an objection to a transfer duty amount which was calculated on a selling price which is below its fair market value and demand that transfer duty be calculated, and accordingly paid, on the property's "true" value. The answer would be to obtain two objective valuations of the property, which can then be uploaded to SARS and will the average of the valuations be used rather than the municipal value.
Other taxes to consider in respect of the sale of a property are donations tax and capital gains tax.
If the property is not disposed of at fair market value, there may also be donations tax payable by the seller at a rate of 20% on the difference between the fair market value of the property and the selling price to e.g. the seller's child at the date of disposal. The legislation provides that, where the seller dispose of a property and the sales price is in the view of the commissioner of the South African Revenue Service (Sars) not adequate, the seller will be deemed to have disposed of the property under a donation.
Any capital gain as a result of the disposal of a residential property acquired for investment purposes (and therefore not the seller's primary residence) would also be subject to a maximum effective rate of capital gains tax.
Each and every property seller and purchaser need to complete and sign a transfer duty declaration in which is stated the:
● Full name and identity number/registration number of seller and purchaser;
● date of the transaction;
● purchase price;
● property description;
● municipal valuation;
● declaration of whether the seller and purchaser are related by blood or marriage;
● in the case of companies if the company controls or participates in the management of the property.
SARS will scrutinise the information and make sure that they do not lose any transfer duty payments and if they are satisfied with the assessment and after payment, they will issue a transfer duty receipt which is used for lodgement in The Deeds Office.
Author: Annetjie Coetsee of STBB Attorneys / Louis Tonkin Attorneys