Speculators under pressure

Changes to the tax laws are making it increasingly difficult for property speculators to rake in the "easy money" that has been the boast of so many in recent years.

Schalk van der Merwe of Sotheby's International Realty operated by Lew Geffen in Pretoria says: "We regularly hear of property developments being bought out within hours of launch. Lured by the prospect of making a quick buck, speculators, whether individually or as a syndicate, buy up property or 'reserve' stands in a new development with the sole intention of reselling for a profit before having taken transfer.

"But speculators have been left with sweaty palms more recently due to the introduction of, among other things, Capital Gains Tax, which imposes taxation on every property transaction. In addition, every property transaction now has to be reported to SARS – which decides whether the proceeds are capital or revenue".

Van der Merwe notes that as a way around this, speculators have tried tying up property in the name of a company or close corporation, and then selling the shares for a profit, "but since 2002 the Transfer Duty Act has stipulated that such a sale will attracts transfer duty on the full value of the property".

Tying up a property as nominee for someone else who is then sourced just before transfer, and who "buys" the contract for the right to be nominated has also been blown out of the water, with SARS ruling that unless a nomination is made upon acceptance of an agreement of sale, it will regard two transactions as having taken place, both which will be subject to transfer duty.

"Another favourite tactic was for speculators to buy from the developer but then sell again before transfer, charging a 'cancellation fee' to the new purchaser. Alternatively, a tri-partite agreement was entered into between the three parties, substituting the speculator with the third party as purchaser.
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"Since 2003, however, tax legislation has provided that should the middleman (speculator) have received just one cent, there shall for transfer duty purposes be deemed to have been two sales, also both subject to duty at the full value of the property".

Van der Merwe adds that the cancellation fee in such transactions is taxable as well, and will most likely be subject to income tax rather than CGT, unless the speculator can prove to SARS that there was no profit-making intent.

"Yet another favourite is for the speculator to bring a new buyer to purchase at the same price, and then to enter into a private arrangement with that buyer to pay the speculator's profit. But that is not so clever for the new buyer, as section 20B of the Transfer Duty Act allows SARS to tax this extra transaction, and furthermore the new buyer's base cost for CGT purposes will now be much lower. And once again, the speculator should declare the income, which will be taxable at normal rates."

The speculator's quest for easy money is fraught with numerous other pitfalls which include the fact that if SARS detects a pattern of buying and selling over time, the speculator can be classified as a "trader in property", which will taint his or her other capital assets. And should SARS rule that tax has been avoided illegally, the penalty is 200 percent on top of the tax, plus interest.

Van der Merwe says: "It is obviously not illegal to speculate, but it is vital to consider the tax implications. Always separate your speculative activities from your long-term investments and do not use the same property vehicle (company or trust, for example) for both. SARS has a myriad of cross-checks in place so it is not worth taking chances."

He adds that investments should be chosen on the premise that should one not be able to sell them quickly, "one will be able to afford to hang on to them, and feel assured that they will still increase in value".