The misnomer of transfer duty
14 June 2013
Posted by: Author: Andrew Lewis
Author: Andrew Lewis (Cliffe Dekker Hofmeyr)
Transfer duty is not actually payable on the transfer of property
Section 2 of the Transfer Duty Act, No 40 of 1949 (TD Act) provides that transfer duty shall be payable on the value of any property 'acquired' by a person by way of a transaction. In CIR v Freddies Consolidated Mines Ltd 1957 (1) SA 306 (A) it was held that:
"The word 'acquired' in the charging section (s2) must therefore be construed as meaning the acquisition of a right to acquire the ownership of property. It has been said to be a misnomer to call the duty a transfer duty: it is in fact a duty imposed, inter alia, on the consideration given by a purchaser of property for the right conferred on him to acquire the ownership of property."
Importantly, transfer duty is triggered on the acquisition of a personal right that entitles the person to acquire the property, to claim transfer (referred to in law as the jus in personam ad rem acquirendam). Actual transfer of the property is not necessary (as per paragraph 3.1.2 of the South African Revenue Service Transfer Duty handbook).
As a result, taxpayers who have previously acquired a jus in personam ad rem acquirendam but not actually taken transfer of a property, have been caught out by this provision and in their mind triggered double transfer duty. In CIR v Collins 1992 (3) (SA 698 (A) the taxpayer had purchased a property from a company. The agreement between the parties provided that it shall become binding on the purchaser as a contract of purchase and sale only if the purchaser shall not have nominated a purchaser who has accepted same within a designated period. The taxpayer nominated a purchaser. However the nomination and acceptance thereof was not done timeously. Initially the taxpayer had successfully approached the High Court for a declaratory order that he was not obliged to pay transfer duty but only the nominee who actually took transfer of the property.
However, the Appellate Division held that:
- The taxpayer fell squarely within the TD Act, which provided that transfer duty was levied, "not on the transfer of property, but on the value of property … acquired by any person … by way of transaction or in any other manner …."
- That the condition on the fulfilment of which the taxpayer became bound under the contract had been fulfilled and the legal effect thereof was that the contract of sale became binding on the taxpayer and, in consequence, he had become vested with the right to acquire the property.
- The substitution of the nominee as the purchaser in place of the taxpayer did not constitute a cancellation of the contract, which would have negated the transfer duty liability in terms of s5(2) of the TD Act. Instead, the court said that "… the legal effect achieved by the nomination and acceptance of the new purchaser was merely the transfer to it of the respondent’s rights and obligations; those rights and obligations were not extinguished and did not cometo an end; nor was the contract wiped out – all of its terms (embodying the 'transaction' as such) remained intact and operative as between the seller and the substituted purchaser."
Taxpayers who are contemplating ceding, assigning or otherwise substituting their rights under an offer to purchase agreement (or similar agreement) should therefore carefully consider whether or not they have already 'acquired' the property for purposes of the TD Act. If there is any doubt it may be referable to cancel the existing offer to purchase and a new offer to purchase entered into between the seller and the substituted purchaser allowing one to rely on s5(2) of the TD Act.