“Where a partner married in community of property disposes of an asset, the disposal is treated as having been made in equal shares by each partner. The gain or loss is therefore spread equally between the partners.” privateproperty.co.za
Becoming a property owner comes with many obligations, chief amongst them being the liabilities for government taxes. The main obvious tax obligation for a property owner, is the local taxation in the form of municipal rates,. However, at a simplistic level, property ownership attracts at least three different kinds of taxation arising from the valuation of the property at a point of purchase.
The South African Revenue Services (SARS), barring legal requirements, at a point of purchase requires payment of Transfer Duty and Capital Gains Tax (CGT), similarly, the local municipality demands every property, within the location of their jurisdiction, after registration with the deeds office, to open an account for levying municipal taxes.
Although many property agents and sellers provide a guiding calculation on transfer duty (or VAT where it is applicable) and CGT, depending on levels of qualification, rarely do they provide for the guideline on potential obligation for municipal taxes. At best, most sellers and property agents, give an indication of the current municipal rates obligation, as if the future depends on it, whereas in truth the obligation of the purchaser for any of these taxes will be based on the agreed purchase price and/or the market valuation, in most instances, based on whichever is the highest.
“A capital gain is calculated by deducting the base cost of a property or investment from the proceeds of the disposal of the property.”
Property valuation and taxation
As a matter of principle the basis for taxation on property in South Africa is primarily premised on the market value of the subject property(ies). The practical application of the market value, though differs depending on the taxation in question and transaction involved.
It is in very few cases, pertaining to purchase transactions, that a full market valuation process is undertaken to establish tax obligation by either SARS or the local municipality. To a significant extend both these institutions rely predominantly on the deeds registered sale price as the ‘reliable’ indicator of the market value. In certain instances, where the registered price is suspected to abnormal, an anecdotal investigation is conducted to confirm the authenticity of the price. In most cases this exercise is neither scientific nor bonafide reliable.
It is advisable that when settling on a purchase price for the both the buyer and seller to understand the tax implication of the demands they are making. The buyer, by agreeing to purchase price, is inadvertently creating a future municipal tax obligation. Whereas the transfer duty is generally easily determinable at a point of transaction, and it is once-off, the municipal tax is for the life on the property.
Further, the registered purchase price becomes a comparable sale and the basis for determination of future market values of similar properties in the area, thus impacting on asking prices in the area.
As a consequence, the purchase price has far greater influence on the market valuation of properties and tax obligations for property owners more than it is generally acknowledged.
Municipal property valuation
Most municipalities in South Africa impose a local property tax in the form of municipal rates. Municipal rates are leviable to a municipality on every property by all owners of property within the jurisdiction of the municipality.
The municipal rates are payable based on a municipal value. The municipal value, from which the municipal tax obligation arise, is always computed based on the market value of the property. The tax obligation (municipal rates) is calculated based on the taxable amount (property market value ) times an assessment ratio times a taxable rate.
The Municipal Property Rates Act is national legislation that empowers municipalities to raise property tax, in a form of municipal rates.
The purposes of charging municipal rates, it is a source of revenue for the local authority.
Market value vs. municipal value, what’s the difference?
The market value is, defined as, an estimated amount at which on the date of the valuation a willing buyer would offer and willing seller would accept, both being fully informed and acting with no undue influences, in an arm’s-length transaction for a property exposed for sale for a reasonable period of time in an open market.
The municipal value is an amount derived from the market value of the property for the purposes of determining the municipal rates obligation on a property. The municipality achieves the taxable amount on each property by making periodic surveys (‘re-valuation’) of all properties in their jurisdiction at least once in every four years.
Whilst the market value of a property changes over time based on the prevailing conditions in the market, environmental considerations and other value impacting factors, the municipal value remains fixed for the period until the next revaluation, which happens to be every four years.
It is always advised against using municipal value as the replication of market value.
Valuation for Capital Gains Tax
Capital gains tax, or CGT as it is popularly known, is a tax levied on sale of property or an investment. CGT is applied to the profit realised on the sale of property or an investment.
The application of CGT has a threshold exclusion of a primary residence on capital gains or losses of up to R2-million. This exclusion applies to natural persons, special trusts, companies, and close corporations on land not exceeding two hectares.
A capital gain is calculated by deducting the base cost of a property or investment from the proceeds of the disposal of the property. The person who is receiving the capital gain or loss from the disposal of the qualifying asset, within the applicable laws, is liable for levying the applicable tax obligation.
According SARS regulations certain personal-use assets do not attract CGT. For example calculation, visit:
https://www.taxtim.com/za/calculators/capital-gains-tax
Valuation and deeds registration of purchase price?
There are primarily two amounts that are registered against the purchased (sold) property on the deed register, viz, the sale price and bond amount, if the property is mortgaged.
The sale amount, derived from the agreed purchase price in the sale agreement, and the bond amount, from the mortgage agreement registered by the bank, are registered against the property as records of the property transaction.
These two amounts remain fixed against the title registration until the next purchase or sale of the property when ‘new’ amounts are captured, the previous amounts are kept on record in the title deed register as part of the history of the property.
Article Credit: Mashilo Pitjeng
Bio: Registered Property Valuer. Chairperson Policy and Advocacy SAIBPP. Chairperson Research Committee PSCC. IoDSA Registered Member. Facilitator EAAB CPD Training – Real Estate Environment and Property Valuations. Consults on real estate asset management, property risk solutions, real estate research and transformation.
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