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Tax implications of partners trading in immovable property on a 50/50 basis

20 January 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q:A client of mine has bought a piece of land with her mother at a 50/50 split of the costs, they are planning on building a house on the stand and then re-selling it. They will not live in that property, so it will not be their primary residence, but once they have sold this property, they want to buy another and do the same, and so on and so forth. They will probably end up developing a property or two properties per year. As the properties will be bought by 2 people, when capital gains is calculated, will each only be taxed on half of the total or will each of them be taxed on the full amounts. 

Also, if she sells the property for over R3 million, then she will have passed the annual limit for registering for VAT, but because it is just something she does on the side, in her own name, will she have to register for VAT? 

A: In our view from what you described the intention of the taxpayers are, these houses are not held on capital account but are rather bought, developed and sold in the pursuance of a profit making venture as trading stock (See Commissioner for the South African Revenue Services v Founders Hill (Pty) Ltd ([2011] 3 All SA 243 (SCA); 2011 (5) SA 112 (SCA)) [2011] ZASCA 66; 509/10 (10 May 2011). In this regard you would have to advise them on this aspect as it has material tax cost implications.

As to distributing the income and expenses this seems to be a partnership and therefore the provisions of section 24H of the Income Tax Act (ITA) should be applied.

In respect of VAT, it would be our view that the activities described would constitute an enterprise for the purposes of the VAT Act and the buying and selling of fixed property would constitute making of taxable supplies. In this respect example 4 of SARS’ VAT 409 Property & Construction guide has a similar example as the facts described and there it concludes that the person would have to register for VAT notwithstanding that he only renovates and sells 1 house per year.  Please also find attached SARS guide in this respect.

http://www.sars.gov.za/AllDocs/OpsDocs/Guides/LAPD-VAT-G03%20-%20VAT%20409%20Guide%20for%20Fixed%20Property%20and%20Construction%20-%20External%20Guide.pdf

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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