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Bugle Sales Talk Editorial

Bugle Sales Talk Editorial

Author: Andreas Wassenaar
Date: 2016-03-04
29th February - 4th March 2016

The budget speech delivered by the newly appointed minister of finance Pravin Gordhan last week had two important elements of change that property professionals should take note of. These were the changes to transfer duty payable on sales above R10m, which would now increase from 11% to 13%, and the changes to capital gains tax, which significantly increased the inclusion rate applied to the capital gain when calculating the taxable portion of the capital gain. For individuals the inclusion rate applied to the gain has increased from 33.33% to 40% thereby increasing the maximum capital gains tax rate on individuals from 13,65% to 16,4%. The inclusion rate for companies increased from 66.6% to 80% thereby increasing the maximum effective capital gains tax rate payable by companies to 22,4% from 18,6%. The R2m rebate received on your primary residence remains the same. The finance minister aims to raise R2bn of the additional R18bn budgeted for during the 2016/17 year from the increases in Capital Gains Tax and Transfer Duty rates.

Some of the media reports have indicated that the marginal increase in the transfer duty rates are not significant enough to deter buying behavior. This view however does not look at the bigger picture over the past few years, and once we rewind and calculate the differences in transfer duty payable since 2014 on certain property transaction levels, we quickly realize that the increases have been significant and basic economics teaches us that these increases have to have an impact on the market. I can still hear the voice of our Economics Professor at UCT saying that if you want less of something - tax it! To demonstrate the changes in transfer duty payable since 2014 lets consider a few examples. We can consider three typical price points of a property transaction - a R5m sale, a R10m sale and a R15m transaction, and apply the transfer duty rates applicable for the three years, 2014, 2015 and now 2016 as of 1st March onwards. In 2014 we have a simple four-tier transfer duty structure. All transactions below R600,000 attracted no transfer duty, the next R400,000 attracted 3%, the next R500,000 attracted an additional 5% and everything over R1,500,000 attracted 8% plus the R37,000 payable up to R1,5m. In 2014 the above three transactions would have attracted transfer duty of R317,000 (R5m sale), R717,000 (R10m sale) and R1,117,000 (R15m sale). From 1st March 2015 following last years' budget speech the amendments to transfer duty provided relief for transactions on the lower end by upping the zero percentage threshold to R750,000 with price bands of R500,000 from there upwards attracting 3%, 6% and 8%, and with everything over R2,250,000 then attracting a new revised high of 11%. For the 2015 year these new rates therefore attracted the following transfer duty across our three examples: R387,500 (R5m transaction representing a 22,24% increase), R937,500 (R10m transaction representing a 30,75% increase) and R1,487,500 (R15m transaction representing a 33,17% increase). We had hardly managed to get used to the new transfer duty rates and we now have the 2016 amendments adding another price band and rate. While 11% is now payable for transactions from R2,250,001 to R10m, everything over R10m now attracts 13%. The lower price bands remain the same. Therefore for the 2016 year, the transfer duty payable on a transaction at R15m is R1,587,500. This is a 6,72% increase on the current year, but represents a whopping increase of 42,12% on the 2014 calculation. There is nothing insignificant about this type of increase and we can expect to see fewer transactions over R10m as sellers decide to renovate rather than sell and buy something else.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar