How is transfer duty calculated when someone buys an interest in a property-owning company?

Author: SAIT Technical

Q: Would you please let me know the process for sorting out a transfer duty problem (deemed transfer duty, actually). 

One of my clients owned 50% interest in a property-owning close corporation and has recently bought the other 50% interest, so that he now owns 100% of the members’ interest.  We have asked a conveyancer to assist with the payment of deemed transfer duty but this isn’t going very well (the deemed transfer duty calculation is four times what it should be).  If possible we would like to deal with someone other than the call centre regarding this query.

Would you please let me know whether we can contact a SARS branch manager or anyone else to assist in this regard? 

A: You can contact the SARS branch manager.  In SARS’s Transfer Duty Guide (2013 version) it is stated that "general queries on transfer duty matters and transactions lodged on eFiling should be sent to ETD@sars.gov.za and technical queries and refund applications can be forwarded to TransferDuty@sars.gov.za.  The guide is available at the following link:

http://www.sars.gov.za/AllDocs/OpsDocs/Guides/LAPD-TD-G01%20-%20Transfer%20Duty%20Guide%20-%20External%20Guide.pdf  

We are not sure what you mean by "deemed transfer duty”.  From the facts we accept that the "50% interest in property owning close corporation” is in fact a "member's interest in a residential property company” (as envisaged in paragraph (d) of the definition of ‘property’ in section 1 of the Transfer Duty Act.  The term ‘residential property company’ is also defined in section 1 of the Act.  The sale (or acquisition) thereof is a ‘transaction’, as defined in section 1 of the Act – see paragraph (b). 

The transfer duty is then levied on ‘the value of (any) property’ which is principally the consideration payable by the person who has acquired the property or the declared value of the property – see section 5(1). 

Section 6 provides for certain amounts to be added to the consideration.  It is quite possible that the SARS is (or will be) of opinion that the consideration payable or the declared value is less than the fair value of the property in question. 

SARS may then determine the fair value of that property, and thereupon the duty payable in respect of the acquisition of that property will have to be calculated - in essence the duty is based on the greatest of the fair value (so determined) or the consideration payable or the declared value – see section 5(6). 

You will notice that the definition of fair value (in section 1) in this regard would be the fair market value of the property held by the CC without taking into account, amongst others, any loan as is attributable to the member’s interest – see example 10 in the guide referred to above. 

Note also that section 2(5) requires that the transfer duty rates in terms of section 2(1)(b) cannot be applied directly to the consideration for the individual transaction (the acquisition of the 50%). The fair value of the entire property must first be established and only then are the rates applied to that value.  See examples 20 and 21 in the guide. 

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.