Buying property in a (Pty) Ltd

The bullet points below provide a summary of the legal consequences of buying property or doing business in a (PTY) LTD Company:

• Governed by Companies Act 71 of 2008
• Managed by Directors
• Established by way of Memorandum of Incorporation
• Financial statements only required to be audited in certain limited circumstances as set out in the Act
• Unlimited number of share holders, and shares can be owned by an individual, a Close Corporation, another company or a Trust
• As the assets and liabilities relating to the property/business are that of the company, the shareholders are not individually liable for the liabilities of the company. Most financial institutions, however, will insist on personal suretyships being signed by individual shareholders. Therefore, if the terms of the loan are not met and the lender sues in terms of the mortgage bond, and the lender does not receive the outstanding balance owing to it from the sale in execution, the individual shareholders will be held liable for any unrecovered balance. If the shareholders are individuals, then their shares and loan accounts in the property owning company can be attached by any of their creditors, i.e. anyone they may owe money to, like doctor's, retailers, banks, spouses in divorce matters, etc.

Taxes:

A company:

• Pays transfer duty at the same rate as natural persons 
• Pays Capital gains tax:
  Inclusion rate: 80% Income tax rate: See SARS website for most up to date rates. Effective rate: 22.4%
• Does not die, therefore no estate duty is payable. However, if an individual is a shareholder of the company, the value of the shares and the loan account are assets in his/her estate and the value as verified by the company's accountant , together with any amount owing by way of loan account will increase the value of his/her estate.
• Dividends tax  of 20% is payable on all profits distributed in the form of dividends to shareholders

Other Tax Considerations:

VAT:

No transfer duty is payable if the seller is registered for VAT (and the property is part of the operations for which the seller is registered), but VAT at the rate of 15% is payable. If the contract does not specify that the VAT is to be paid over and above the purchase price, then it is deemed to be included in the purchase price.

If the property is sold as a rental enterprise or as a going concern e.g. a guesthouse, the deed of sale must contain certain specific provisions and may be zero rated for VAT. This means that no transfer duty or VAT is payable.

If the purchaser registers for VAT, then the Vat (or the transfer duty) can be claimed back as an input credit in certain defined circumstances.

Income Tax:

If a property investor does not acquire a property with the intention of holding it for an indefinite period or for rental purposes, but with the intention of selling it to make a profit, then SARS may well regard the investor as a dealer and levy income tax at the investor's tax rate on the profit. Capital gains tax will not apply if income tax is payable.