Johann Rupert, who spoke in the afternoon, was equally pessimistic about the state of the world economy. Rupert is also convinced that the worst of the financial crises is still to come and that the bad debt has only been moved from private to the public domain.

When asked about where they would invest if they wanted to retain their investments they were of similar mind. Taleb casually suggested FARMLAND, as well as selected commodities. It’s nice to know that in the case of financial meltdown, great minds still would put their money into Property, even if it is for the purpose of agriculture.

So let’s digest the farmland investment. Buying a farm as a business is not viable unless you are in the business of farming and understand the risks associated with it. Most farmers will tell you that it is a lifestyle, a labour of love, and not really a means of generating wealth. So at best you will earn is a nominal rent for your farmland and have a tenant that maintains and protects it. Your yield will be low, really low. And what about capital growth? Farmland has not performed well, especially in South Africa, so you had better hope that the financial meltdown is catastrophic and the intrinsic value of the farm land is highly sought after as food supplies become a scarce and reach a premium value. Also you had better hope that lawlessness does not prevail and your asset is not invaded by those seeking food and shelter.

I still believe that even in meltdown conditions, shelter will be a primary human need, and people will barter whatever they can earn for food, clothing and shelter. And shelter may not be the 5 bedroom house on the beach, but a small apartment in a secure complex, in a good area. Sure the rent will not match what is currently generated it will still be in the priority basket for those who have some means. Interest rates will be low, and the banks will have bigger problems than repossessing properties with arrears.

Thanks Taleb, but if we are talking about property, I still bet on entry level residential apartments as a “safe as houses”.

In fact the day after the summit I signed for 5 units in a complex advertised recently on this newsletter.

South Africa hosting the 2010 World Cup is history in the making indeed. Many predictions were made and there are still many more to come.

IPS is going to be talking about the impact that the World Cup has had on the South African Property Market. Where are we currently and where to from here? We would certainly like to hear your views,thoughts and comments.

Please do join us for our online webinar,we have Scott Picken, CEO of IPS, as a guest speaker who will be sharing invaluable information with us. Dont miss out on this one we have some interesting information.

Click below on the link to book

https://www2.gotomeeting.com/register/525873083

It was not only the bureaucrats who performed admirably, policing crime like few believed possible, home affairs getting hundreds of thousands of visitors through immigration at the airports courteously and efficiently, municipalities implementing transport plans, cleaning organising, and many more dysfunctional government and quasi government departments that seemed to wake up and get into gear, but our formal economy who put together the world leading stadiums, roads, airports and modern railways in very tight timelines, showing what we can achieve and that we still have the skills to pull off hairy audacious projects.

But the most exciting thing for me was the way ordinary South Africans got stuck in as a huge family, supporting out team, sure, but also becoming ambassadors in small ways, cumulatively adding up to the biggest PR and marketing expose ever in Africa.

So let’s now move into a period of working to win (and not for the elite few). Lets no longer be blackmailed by political rhetoric that belongs in the past. Lets shut down the “tendopreneurs”, the leeches who suck, steal and poison the poor and the vulnerable, while at the same time pretending to represent them.

And housing can be a creator, a huge driver in this new era. The old Western economies are not going to be growing fast enough to pull us up by our bootstraps, and our exports are expensive in international terms, so growth will have to be domestic. We will have to do it ourselves….but we can.

I say drop interest rates again, get the bank’s lending, get some skills into the municipalities so developers can build houses. Not only will the building sector create the right type of employment, but the secondary industries including furnishings and fittings which will give the local economy a big boost. Increased receipts from company taxes and transfer duties will prop up the huge social spend that we have to have. Lets encourage international investment, in fact I would take it a step further and market South Africa as a retirement destination for wealthy foreigners. Government will have to act, showing the world clearly what our policy is to foregion investment in local real estate and how important the constitution is to the people.

According to ‘Economist’ magazine, The publication’s Global House Price Index shows that SA house prices rose by a cumulative 418% over the past 12 years (1997-2009). That far outstrips any of the other 20 housing markets tracked by the index. The next best performers were Australia, Britain and Spain with growth of 181 %, 175% and 167% respectively. While some of those countries may have relapsed recently, South Africa escaped the global crises very well, and most of our losses have been recovered in terms of house prices.

So would that not mean that South Africa should be a safe haven property investment destination for foreigners?

And that gets me back to my point of the successful world cup. Lets follow up with proudly presenting property, and lifestyle investments to those foreigners who got to see the true South Africa. And lets not forget about the million or two skilled South Africans that are living abroad – come back, bring your skills and capital and we can show Brasil, China, Russia and India how to eradicate poverty in 10 years.

Its really that easy, just like hosting the biggest world event, SUCESSFULLY. It depends if you really want to do it?

For the sake of brevity, our discussion hereunder will refer to “Companies” which will also collectively refer to Companies, Close Corporations and Trusts. 

The South African Revenue Services(SARS) has made the practice of owing one’s domestic residential property in a company very costly from a tax point of view.   Most people do not realise how large the bundle of taxes is; especially when the shareholder of a home owning companies dies.   The total mix of Estate Duty, Double Capital Gains Tax, and Secondary Tax on companies together with the annual fee, which is payable to CIPRO, is extreme! By taking advantage of this amnesty, you will save the full Capital Gains Tax payable by the company, the Secondary Tax on companies, as well as the cost of the annual return to CIPRO.   You will still pay Capital Gains Tax on death (now once instead of twice) as well as Estates Duty on death.

I, therefore strongly recommend that owners of companies that own a property that is used mainly for domestic purposes as an ordinary residence take advantage of this tax amnesty to transfer ownership of the property into their personal names.   The requirements are as follows:

• you, alone or together with your spouse, must have directly held all the Share Capital or Member’s Interest from 11 February 2009 to the date of Transfer;
• you, alone or together with your spouse, must have “personally and ordinarily resided in that residence and used it mainly for domestic purposes from 11 February 2009″;
• the property transfer must be registered by no later than 31 December 2011;
• there will be no transfer duty, secondly tax on companies or capital gains tax arising out of the transfer into the private name;
• on resale of the property from the individual, the base cost will be the base cost as it was to the company, plus any additional allowable expenditure, A primary rebate (currently R1,5 million but subject to conditions), will apply to primary residences;
• the company must be de-registered following the transfer of property;
• existing mortgage bonds will have to be cancelled, substituted or re-registered in the name of the private person taking transfer.   Conveyancy fees for the transfer, advance rates and taxes, registration and cancellation of bonds will be payable together with the cost of de-registering the company or close corporation.

Housing Vacancies Reach New RecordHousing and rental vacancies have hit unprecedented levels. Included in these record vacancy numbers are a plague of abandoned properties fated for demolition, and millions more homes being withheld from market. Of the more than 19 million empty homes recorded by the US Census, just under 2 million are up for sale, many of them in uninhabitable condition. Even though the economy remains weak and the housing market, in particular, is still years from recovery, some news suggests that stronger growth can be expected as the year progresses.

A record 19.2 million U.S. homes are vacant, representing the highest number of residential properties that are vacant of all-time, according to the U.S. Census Bureau. The figure represents 14.5% of all the homes in America. The dismal figure was issued as part of the Census Bureau homeownership quarterly survey for the first quarter of 2010. A total of 19,230,000 homes are vacant, according to the report. The same study shows that 10.6% of all rental properties in the nation are vacant, also an all-time record. The report does not differentiate between homes that are inhabitable and those that are not. In particularly hard hit markets, including cities in Michigan and Ohio neighborhoods of abandoned homes are being demolished by wrecking crews hired to clear them. Many cities are considering the option of clearing whole neighborhoods, where vacancy rates top 50%, including Detroit. It costs about $6,000 to $7,000 to demolish a home. The Census Bureau study estimates that there are about 131-million homes in the country and that nearly 4.5-million are currently for rent. The vacancy rate is the highest in the Southern region of the country at 13.2%. Some areas of the south like South Carolina have been hard hit by companies that have moved out of the U.S. out-sourcing the manufacturing of products. Metropolitan areas have a higher rate of vacancies than communities outside of big cities, averaging 11.3%. The vacancy rate was the lowest in the Northeast at 7.5%.

However, the study also shows that a massive number of homes, 7,131,000 are being held off the market in limbo for a variety of reasons, which include impending foreclosures , short sales that went awry or homeowners that are unable to sell their properties as a result of other issues. The foreclosure epidemic has resulted in a lower homeownership rate and continues to decline, showing 67.2% at the end of the first quarter nationally from 69.1% at the peak of the housing boom in 2005. Ownership rates hovered in the 64% range from 1985 through the mid-90s when political pressures and massive campaign contributions were made to Congressional candidates from special interests, including bankers and Wall Street. Slightly less than 2-million homes are on the market for sale. Many are old and dilapidated, having outlived their usefulness. The blight of old rotting homes troubles inner-cities more than more suburban or rural areas.

Go to www.ipsinvest.com for international property opportunities.

I am sure Robert Collier would agree that the opposite is also true. By “reducing supply will eventually increase demand” as too much money chases too few goods. It’s no secret that we are coming out of one of the worst recessions on record, which has had a marked effect on demand for property, especially residential property. (Commercial usually follows the cycle months later). Demand decimated the supply side of the industry. If demand is depressed for long enough, the supply of new houses will dry up as developers and speculators leave the market in increasing numbers, and in fact that is what has happened.

Stats released by ABSA on the 15 June show further deterioration in the volume of housing units completed so far in 2010 and an equally low number of new plans approved. Let’s face it 2009 was a bad year for property and any developer still submitting plans for approval was pretty determined, but look at what has happened in 2010, the year of the world cup and an economy surprising even the most optimistic of economists!

In the chart below “buy to let” products, predominantly flats and townhouses, decreased a further 46.2% from a pretty poor period of 2009!

I accept that reading the residential property market involves looking at all the fundamentals together. We will have to look at the effect of Job losses, the surplus stock left over from the boom, as well as the residential rental market.

I will argue in favour of house price increases for all these examples in a separate blog, but if you have strong opinion please comment below.
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A recent NEWS article on the PP features a town called Lephalae. The town (previously Ellisras) is the place where Eskom’s new multibillion rand Madupi power station is being built, and already rentals have increased to the point where you can’t find a 2 bedroom apartment to rent for less than R6500 per month. The shortage of stock means that investors buying into residential developments can expect a rental yield of over 12 % plus strong capital growth. (If you don’t believe me look at the development featured below)

Lea Jacobs from Business Day interviews Scott Picken, IPS CEO on investing offshore

• Has there been an increase in South African’s investing in offshore property? If so, what do you believe is driving this?

International Property Solutions (IPS) has been helping investors invest overseas since 2003, and during these times we have noticed significant trends in people investing overseas. Ironically people tend to want to invest overseas when the Rand devalues sharply or there are problems in South Africa and not when the opportunities are present. In an article by Real Estate Web, it reported research which says that over 80% of South Africans who invest overseas actually lose money. I personally believe it is actually higher than this as investors don’t have the right partners, the right knowledge or information. However I believe the most important reason for these losses are that people make panic purchases, rather than strategic investment. In the last 18 months we have noticed a significant increase in people wanting to invest overseas, however I believe for the right reasons. They understand that asset values in first world countries are undervalued, yields are good and the Rand is also strong. Due to economic uncertainty, people are now doing allot more research, getting all the right information so that they can make far more educated decisions. We have noticed a marked increase in demand, but people are still very hesitant to commit, until all their concerns understood and fore filled. I believe this move to strategic investment will ensure not only that investors make money, but that they will achieve their goals of growth, asset preservation, a Rand hedge and most importantly peace of mind.

• What countries are proving to be the most popular?

In the last 3 years it has been very interesting to review. In 2008 there was a strong bias to London as the interest rates were lower and so the cost of capital and the yields allowed investors to see cashflow positive returns from day one.  Then towards the end of 2008, with the Global Financial Crisis, there was a significant swing to Australia. Australia was the only economy in the G20 last year to not go into recession and their property market also grew by 8.6% in 2009. For this reason investors strongly sort opportunities in Australia. In 2010, it has returned to a far more even spread of 50 / 50 for London and Australia. They both have key differentiating factors and it ultimately depends on what the investor is trying to achieve which determines the best destination for them.

• What types of properties generate the most interest?

In London it is apartments in the more established (well known) areas. In the past 12 months there has been a significant interest in existing properties, where there is real value. In Australia, the focus is on 4 bedroom, 2 bathroom houses in the major cities. 85% of Australians live in the middle class and it is the Australian dream to own a home. Based on this, these properties provide the best rental prospects and also the best returns.

• The European economy has been under the spotlight in recent days. In your opinion, is it currently the right time to invest in a property on this continent?

As with any property investment, it is unwise to look at markets holistically. You need to look at each and every opportunity and analysis whether it suits your investment requirements. Obviously the fundamentals are very important and I would certainly spend a tremendous amount of time understanding all the risks, as there is allot of uncertainty in that market at the moment. As we have learnt recently though, in amongst uncertainty also lurks allot of opportunity if you know how to find it.

• Do property transactions conducted in an overseas country have to be cash based, or can finance be arranged?

Typically in first world economies you can borrow 70% from local banks in those countries. The lending criteria varies from country to country and you require experts to assist you with this to ensure you get the best financing options. It is not about going to the local bank you have a current account with. In some countries, if you have cash, there can be significant opportunities from being able to act quickly.

• Why should investors consider the overseas property market and not stick to SA properties?

I am so passionate about South Africa and started IPS, selling South African properties all over the world. I believe we have one of the best emerging economies in the world and with the market fundamentals of growth and the Black Middle Class, I believe there are better opportunities to create wealth in South Africa than anywhere else in the world. I also believe as locals we understand the markets and therefore can manage the risks better. I invest the majority of my wealth in South Africa as I believe I can get far greater growth, but I also believe it is not only prudent, but wise, to invest some of my wealth overseas! Any sophisticated investor would understand that it is essential investment strategy to have some diversification. In my opinion if you are looking for growth and emerging economies then there is no where better than South Africa. However when you are looking for strategic investment, asset preservation, Rand hedge and stable incomes streams, then you need to be focusing on First World Assets, First World Incomes and First World Currencies. This will not only balance your portfolio, but it will give you peace of mind that you are covered for every eventuality. Two final things to say on this, you cannot rush this and make brash decisions when you suddenly panic about something like currency, political or economic developments you are not happy about. You need to plan and make decisive, strategic approaches which ensure you long term future goals. Secondly this is not something which only South Africans have to think about. International Property investment is a trend which has been happening for over 300 years. For years, investors from around the world, especially the British, Irish and Australians have been investing in various international property markets where they can achieve their investment objectives long term.

• What are the pitfalls in investing overseas?

As I said, more than 80% of people who invest in overseas markets lose money.  I have explained the reasons for this, but without a strategic investment approach, the right information and the right partners, you are destined to make mistakes and unfortunately they are often in first world currencies which hurt allot more. Bottom line is the risks are allot higher and the losses therefore allot more. It is complicated and you need to either partner with the right people or know what you are doing.

• What are the benefits?

As I have explained for me the major benefits are growth, asset preservation, Rand hedge, income streams in first world currencies, but nothing is as substantial as peace of mind knowing that you have a cohesive, strategic investment strategy which plans for all eventualities.

• How long have you been involved in selling foreign property?

I have been involved in foreign property investment since 1999, when I moved to London. Although I have been involved and passionate about international property all my life. My visions is that property is going global and I did my undergrad thesis at UCT (1998) on how IT was revolutionizing the property and construction industry, providing a global platform and in the 1990’s creating a paradigm shift. We are developing a solution at the moment for International Property which we believe will do to property what Google did to the internet!

• You obviously conduct a great deal of research by visiting various countries. In your opinion which country is currently offering the best opportunities? Why?

That is an impossible question to answer. It all depends on the investor and what they are trying to achieve. Each country has its own nuisances and based on these and understanding the investors intention, one can help to devise a strategy which suits those requirements. The beauty with the property going global is that there are so many more opportunities!

• Should investors consider “going it alone” or should they ensure they use a reputable international real estate broker?

I think I have explained this in depth above, but the bottom line is that most people lose their money when they invest internationally. You can’t use your tried and tested “gut feel” as your South African gut doesn’t understand the international markets. You also have to be very careful about your partner. Are they a company who specialize in selling international property or an estate agent who offers it as supplementary solution. Do they work with “Best of Breed” partners in the respective country to ensure you are getting the maximum returns from that local market? How much research do they do, how much do they spend on research and how often do they travel to those countries to fully understand the markets? Finally do they have local representation and a sophisticated after sales service to ensure you are provided with a key executive who will help you right through the international property investment cycle, not someone who is just focused on the sale? For international property, there is also an international body called AIPP, which is the Association of International Property Professionals to regulate this industry and ensure that clients receive the value they are promised. IPS was the first South African company to join this organization, which is based out of London.

• We have heard a number of horror stories about investors being taken for a ride, what dangers are associated with buying foreign property?

The biggest issues are if you are paying the market related value, managing the purchase process, getting a mortgage (if you are reliant on this) and then I believe the biggest risk is where the tenant demand is going to be. An example of this in the last 2 years, is that many South Africans invested in Manchester and Leeds in the UK. They were promised that there would be significant tenant demand as BBC would be relocating to Manchester and that there was significant student demand. Well the BBC never moved and the students don’t want to live 15km from campus. Therefore there are over 2000 units standing empty, values have dropped 60%, there are no tenants and no bank will provide mortgages. This is a classic example of the wrong information and the wrong partners.

• How do SA foreign exchange control regulations affect foreign property investment?

As a South African you are allowed to take out R4 million per person, as part of your direct foreign allowance. As long as your tax affairs are in order, you apply to the Reserve Bank and they will provide you permission to externalize this capital. You can then use this money to invest. Also people involved in property companies can also apply for their FDI( Foreign Direct Investment) and they are allowed to externalize up to R500 million into a profitable offshore business.

• Could you please discuss the effects the recession has had on property markets around the world highlighting the areas most affected. In your talk you mentioned that Las Vegas had borne the brunt of the slump in the US while New York had emerged relatively unscathed. Would it be possible to give the readers some figures, indicating which other areas have been severely hit by the recession and whether these areas have potential for foreign investment?

I do not know how much detail you want me to go into here and so I have 3 of my latest reports. Please contact adele@ipsinvest.com to get copies of them:

• USA Property Report
• AcadHPI – latest UK report
• RP – Data – Australian market report

These are all on our website – www.ipsinvest.com

I look forward to assisting you.

Thanks

Scott Picken

There was a lot covered and I hope the other speakers will share some of their topics here on this blog. I spoke about my current view of the residential property market at the moment.

A mistake that investors make as a rule is misreading the market, buying high and running when the market turns sour. While property investment is not always driven by capital growth, or the increase in the value of the real estate, it is capital growth that motivates us mostly in residential investment, so it is important to buy at the right time.

No matter if you are a person who always the sees the glass half empty, or half full, you can’t ignore the signs that are shouting at us. We have the lowest interest rates since 1974, replacement costs of homes have swung firmly in favour of second hand homes creating a disincentive to create new houses. New emerging middle class buyers are entering the market and buying or upgrading adding more demand to the equation. On the supply side Developers are building half of what they were producing last year and the surplus stock that they were holding is being soaked up. And finally if you are not looking at the fundamentals that drive prices up, look at what is actually happening in the market. Rentals are firming, and all the indices are showing positive growth, even real growth.

And if you argue that i have a bias towards property, i will show you why:

This graph shows how house prices fared against other asset classes. The graph, compiled by Jacques du Toit, Sectoral Analyst at Absa Retail Bank, shows that house price increases outperformed Gold, Shares, Fixed deposit and CPI Inflation over 5, 10, 15 and 20 years.

That is why Real Estate is in my view the best place to protect, hide and create wealth.

Back to the event last week ….

The stats and forecasts that emerged from various experts in residential, investment, commercial and leisure real estate sectors where encouraging, and further confirmed my views that Fractional leisure real estate is set to boom going forward. Here are few of my motivations for this view.

Over 50% of bond applications are being rejected by South African banks.

This indicates that people still aspire to acquire homes and second homes. If these people can’t get the holiday home on whole ownership basis they are motivated to consider shared ownership in one of its various forms (such as Fractional Ownership). Even the recession didn’t seem to stop us aspiring to acquire better lifestyle for ourselves and our families!

We are changing the way we view leisure asset ownership.

I believe there has been a ‘mind shift’ in the way we view our leisure asset ownership (especially the non-essentials, like holiday homes and luxury cars & boats). We are re-evaluating what these assets mean to us, what they are costing us when we are not ‘using’ them, and how we can get the maximum value out of these assets. Fractional ownership of these luxury assets allows us to still enjoy the fruits of our labours – however only own/pay for what we intend to use.  Similar to how ‘pay as you go’ opened up a new market in the mobile telecoms industry.

Post 2010 – Many hospitality based real estate owners will be looking for ways to unlock value from their B&B’s hotels, resorts and guest houses.

Leisure sectional title hotel ownership, private residence clubs and fractional ownership are all vehicles for these owners to attract a broader base of owners and increase room occupancy levels – which in turn drive on-site revenues of spa’s and restaurants etc… in turn consumers will become more attracted to serviced and hassle free leisure real estate, especially the products that provide added value perks such as rental options, local and global exchange options, and personal concierge style services.

The FNB House price index reports a cumulative growth of 194% since July 2000.

This demonstrates that over the medium to long term property is still a good place to invest. Over 5, 10 , 15 and 20 years ‘general’ property growth outperformed all other equity markets in South Africa. Now I am of the view that Fractional ownership is a medium to long term indirect capital investment into professionally managed luxury real estate. Yes – you pay a premium for the privilege of owning a share and not the whole property, and yes there are levies and management fees associated with shared ownership involved. Nevertheless fractional property ownership could just be the vehicle for us to enjoy a lifestyle investment that is underpinned by real estate values.

Numerous property buyers have asked me the question ‘In which entity should I buy a house/flat or holiday home?’ Each person’s circumstances differ, and it is not a straight forward answer. What is preferable from a legal perspective may not necessarily yield the best result from a tax perspective. 

If the property in question is a person’s primary residence, then it’s nearly always better to buy the property in a person’s own name. The reason is that the primary capital gains tax exclusion is R1.5 million. This is only applicable to individuals and for South African tax residents. (Remember a non-resident becomes a SA tax resident as soon as his intention is to make South Africa his primary home or if he spends a certain amount of time in SA). For non-residents, my advice is usually if a couple is buying to put it in both of their names, especially if they do not earn any South African sourced income. The benefit is here that both will have the advantage of the annual capital gains tax exclusion of R17 500 and not be taxed for income tax purposes on the first R57 000. Example: If a couple with no other South African income is making a R491 000 Capital gain, they will not have to pay tax at all. Each receives a capital gain of R245 500 (50%), the first R17 500 is exempt and only 25% of the balance (R228 000) is taxable. 25% of R228 000 is R57 000, and fortunately the income tax exemption is R57 000.   The exemption (R88 527) is more for people aged 65 years and older. 

If a person is buying a second property, then it might be the best to buy it in a trust, especially if the purpose is to buy it with a long-term objective. This could have various benefits, for example security against creditors, spreading the rental income and capital gains to various beneficiaries, pegging the value for estate duty purposes, etc. 

Non-residents buying property in South Africa should remember that it is advisable to have a separate will in South Africa for their South African assets.   

Property buyers should preferably not buy a house or a flat in a company, except if they want to do property development. Numerous people have made the wrong choice to buy their house by buying the shares in a company or close corporation that owns a house.  The administrative costs each year could be substantial. If you did bought your house in such an entity, then I would advise you to try and sell your shares rather than the entity selling the house. This way, you could save a substantial amount in capital gains tax (the capital gains tax rate for companies is higher than for individuals). 

It is important that taxpayers contemplating property transactions obtain proper tax advice to ensure that their obligations are met and their overall tax burden is minimised.   

 When deciding on the best way to purchase property, you should first look at your objective regarding the property.  You need to ask yourself the following questions: 

1. What do I intend to do with the property? Am I buying it for a short-term period or will I hold on to the property for an indefinite period of time?
2. Am I going to renovate the property and sell it, to make a profit? If you do this on a regular basis, then you will be classified as a property developer and you will pay income tax of 40% on the profits and not the capital gains tax at 10% (tax rates will be dependent on your income tax rate with the maximum payable).
3. Am I buying the property for rental purposes?
4. Am I buying the property to give it to my children one day?
   Is estate duty a concern of mine?
5. Am I concerned about asset protection?
6. Will the property be my primary residence?

 As far as residential property is concerned, there are two ways in which to purchase the property: in your personal name or in a Trust. Let us compare the two. 

Personal name: 

Advantage:

The transfer duty is low – up to R500 000 the transfer duty is Rnil. From R500 000 to R1million it is 5%, and if the purchase price is more than R1 million then the transfer duty is 8%. 

If it is your primary residence you will not pay capital gains tax on the first R1.5 million of growth in the property. If you purchase a property for R2 million and you later sell it for R4.5 million you would have made R2.5 million profit. You will not pay capital gains tax on the first R1.5 million of the profit, so you will pay CGT on R1 million. 

Disadvantages:

As the property is in your own name, it can be attached by creditors. It forms part of your personal estate and you will have to pay deathbed expenses. Let’s use the same example and assume you die when the property is worth R4.5 million. 

Estate duty will be payable at a rate of 20% or R900.000 (if you have other assets of R3.5 million). The problem only increases as the property grows in value. If the above property were a second property, you would have to pay capital gains tax of 10% assuming your marginal rate was 40%. Your estate would have to pay 10% CGT based on the R2.5 million growth or R250 000.  

Even if the property is your primary residence, you will have to pay CGT on R1 million (R100 000). You will have executor’s fees to pay of 3.99% on R4.5 million (R179 550). Your estate will be frozen and takes a long time to wind up an estate. If your beneficiaries inherit the property in their own name, it will form part of their own estate and they will have the same disadvantages. 

When you add up all the deathbed expenses, you will pay R1 179 550 or 26.2% of the value of the property in the case of a primary residence. If it is a second property, it will cost R1 329 550 in deathbed expenses or 29.5% 

Trust: 

Advantages:

• The property will be protected from your creditors
• It will not form part of your personal estate so you will not pay the certain deathbed expenses, i.e. Estate duty of 20% and Executor’s fees of 3.99% (advice is here to name your spouse or child as executor. Your spouse or child could then negotiate executor fees of at least 2% with an accountant or attorney)
• No capital gains tax will be payable on your death if your beneficiaries do not sell the property i.e. if it is a holiday home or an investment property. This does not mean capital gains tax will never be payable, it just means it won’t be payable on your death, but only when the property is sold. When the property is sold, the money will be available to pay capital gains tax. Your beneficiaries will not be forced to sell the property to pay capital gains tax.    
• There will be no freezing of the property, as it does not form part of your estate.   If you were to sell the property you would have immediate access to the proceeds of the sale. 
• As the property is owned by the Trust it will not form part of the beneficiaries’ personal estates and no further estate duty will be payable unless the beneficiaries deliberately take the asset out of the Trust and place it under their personal name. 

Disadvantages:

• Transfer duty is at a flat rate of 8%, which is higher than if the property is purchased in your own personal name.
• If the Trustees decide to sell the property and keep the money in the Trust, the Trust will pay 20% capital gains tax, which is higher than the 10% you pay in your personal name. 

Important: The Trustees can pass the proceeds of the sale out of the Trust to the beneficiaries of the Trust and the beneficiaries will pay capital gains tax in their own name. This means you will never pay more capital gains tax in a Trust than in your own name if it were a second property! 

Example: If the property is your primary residence and it is owned by a Trust, you will pay between R150 000 and R400 000 more than if it is in your own name. However, you need to compare this to R1 179 550 or R1 329 550 in total deathbed expenses. You then need to decide which option is most appropriate for you.  

Non Resident Capital Gains 

If you are resident in South Africa, a capital gain is the profit you make when you dispose of an asset after 1 October 2001. If you are a non-resident you will only make a capital gain on the disposal of immovable property situated in South Africa, or on any asset attributable to a permanent establishment that you may own in South Africa. 

You will only pay tax on a portion of the profit that you make from the sale. This means that you can deduct the cost of the asset (the base cost) from the proceeds of the disposal, as well as the agent’s commission on selling. If you acquired the asset before 1 October 2001, you must only include the profit that accrued after that date in your taxable income in the year in which you dispose of the asset. 

The main costs that form part of the base cost of an asset are:

• The price you originally paid to buy it or create it
• The cost of valuating it
• The costs directly related to the acquisition or disposal of that asset, namely remuneration of a surveyor, valuer, auctioneer, accountant, or legal advisor, for services rendered
• Transfer costs
• Stamp duty, transfer duty, or similar duty
• Advertising costs to find a seller or to find a buyer.

 There is an annual capital gains tax exemption of R16 000 and 25% of the balance after deducting this from your profit will be added to your other South African income and taxed accordingly. Due to the annual tax threshold of R46 000, no tax will be payable on the first R200 000 of your capital gain if you have no other South African income. The maximum that you could pay in taxes on your capital gains in South Africa is 10% of your capital gain.   That is because the maximum tax rate is 40% and only 25% of capital gains is taxable. You will pay less than 10% if your other South African income is less than R490 000. 

There is also a primary residence exclusion of R1.5 million. This is however only available if the property is deemed to be your primary residence. It is clear from the definition that if a company, close corporation or ordinary trust owns a residence, it will not qualify as a primary residence, even if it is occupied as his residence by a shareholder of the company, member of the close corporation or beneficiary of the trust. 

When a person disposes of a primary residence together with the land on which it is situated, the exclusion of the capital gain or capital loss will apply only to so much of the land, including unconsolidated adjacent land as long as the land:

• Does not exceed two hectares;
• Is used mainly for domestic or private purposes together with the residence; and
• Is disposed of at the same time and to the same person as the residence.

An adjustment must be made when a person has occupied a residence as his primary residence for only a part of the period during which it was held after 1 October 2001. The capital gain or capital loss to be disregarded in these circumstances must be determined with reference to the period on or after 1 October 2001 during which the person concerned was ordinarily resident in the residence.  

There is an exception to this rule when a residence remains unoccupied in special circumstances. A natural person or a beneficiary of a special trust must be treated as having been ordinarily resident in a residence for a continuous period of up to two years if he/she does not reside in it during this period for any of the following reasons:

• The residence was offered for sale while it was primary residence and it was vacated due to the acquisition or intended acquisition of a new primary residence.
• The residence was being erected on land acquired in order to be used as his primary residence.
• The residence was accidentally rendered uninhabitable.
• The natural person or beneficiary died.

Capital gains tax is payable on or before 30 September of the next tax year. A South African tax tear is from 1 March to the end of February. If you therefore sell your property on 15 March 2008 and have to pay capital gains tax, then you should do it on or before 30 September 2009. Please take note that you will not be able to sell fixed property if you are not tax registered in South Africa. 

When Do You Need To Register As a Taxpayer in South Africa? 

Persons who are not “residents” as defined are subject to South African normal tax on their income that is derived from a source within or deemed to be within South Africa. Someone that went to the UK to work there will most probably after a year fall in this category (you will be still a South African resident, but not anymore a “tax resident” in South Africa.) 

People are often unsure if they need to register for tax in South Africa, while abroad. Anyone who receives an income tax return must complete and return it irrespective of the amount of income of the person. If they did not received taxable income in South Africa, then they need to submit a R nil return. A person will need to register if he/she is going to sell a fixed property in South Africa. The sale will not take place if the seller is not tax registered in South Africa.  

People that need to register for tax purposes in South Africa are people who:

• Receive income from a business in South Africa (irrespective of what the taxable income or assessed loss is.)
• Receive rental income in South Africa that is more than R12 000 per year.
• Receive capital gains in South Africa.
• Receive interest that is more than R18 000 if the person is younger than 65 years or R26 000 if the person is 65 years and older (Please take note that interest received by or accrued to a person who is not a resident is exempt from normal tax in terms of s 10(1)(h) of the South African Income Tax Act. The exemption is unavailable to a natural person if he was physically present in South for more than 183 days in aggegrate during the year of assessment in which the interest was received or accrued.  The exemption is also unavailable to a person who at any time during the year of assessment carried on business in South Africa through a permanent establishment.)
• Receive income, other than remuneration. 

One needs to register as a provisional taxpayer if your income is going to be more than the tax threshold (R43 000 for individuals younger than 65 years and R69 000 if you are 65 years and older.) Provisional tax is collected on a six-monthly basis. People often forget or are not aware that they need to register as provisional taxpayers if they receive income that is more than the tax threshold or on returning to SA and starting their own practice. Interest, penalties and additional taxes become payable, where:

• estimates of taxable income or payments of provisional tax are incorrect; or
• estimates of taxable income or payments of provisional are not made by the last day of the period prescribed for payment.

Anyone who receives a provisional return needs to complete it and return it to the South African Revenue Services, even if you have received no income in South Africa! If you do not, then you will not be able to sell your fixed property in SA in the future or get a tax clearance (to take out some money).   

If a South African is for 184 days in any 365 day period out of South Africa (and that includes one continuous period of 61 days) then he will not be liable for tax on the foreign income earned in this period. Please take note that if you are, since 1 February, working in London, that you do not submit your 2007 tax return before you have passed the 184 day and 61day test. If you do, then you will be taxed in South Africa on February’s UK income!    Please take note that it is also not necessary in the 2007 tax return to inform SARS regarding your foreign income, if it is not taxable in SA.  

Are Flight Tickets Tax Deductible?

More and more South Africans are living abroad and have property in South Africa. Many of these people decide to invest in property in South Africa and to have a holiday home in South Africa or start to buy a flat or more in South Africa as future pension income.  

I have had numerous queries from expatriates that ask me if they could deduct their travel costs to South Africa. The answer is “yes”, it is tax deductible if the travel cost is in the production of income. If you for example fly to SA to check on repairs, then it is a tax deductible expense. What normally happens is that you combine it with a holiday in South Africa. The South African Revenue Services could therefore assess that only 50% of the ticket was in the production of income.  

If you fly to South Africa to come and have a look at a few properties to buy, then your expense will be of a capital nature (and will decrease your capital gains tax liability on selling the property). The same applies if you have a flat and your previous tenant has left and you are now doing repairs to the property before you rent it out again, or if you have just bought it and do repairs before you start to rent it out. The Receiver will deem the repairs as of a capital nature and also your travel costs. The reason for this is because the expense was to get the flat ready to rent it out (an expense in creating an income producing asset). It might be a good idea if you do come to South Africa to view more properties to buy, to keep the brochures of properties that were given to you by estate agents, and to keep their names.    Keep also any projections that were made to you regarding the feasibility of the project, how much the rental income in that area is and how much the rates, insurance, repairs, etc. will cost you. This will be of assistance if there are any queries from the Receiver.  

These capital costs will be deductible in calculating your capital gain on selling the property. Also any travel cost to South Africa to sell the property is of a capital nature and will decrease your capital gains tax liability.  

Remember that you have to register in South Africa as a provisional taxpayer if your South African rental income is per year more than R12 000.  

The 2007 income tax returns have been issued and must be submitted on or before 31 October 2007.

Is It Worth Dissolving a CC And Buying Property In Your Own Name?  

As a Tax Consultant I am often asked “Is it worth dissolving a company (a property that is registered in a company) and buying the property in one’s own name?”  

To enable one to answer this question one need to take the following factors into account:

• How long does the client intend keeping the property? It is not advisable to do the transfer if the intention is to keep the property for less than 2 years.  The cost of transfer outweighs the tax benefit of paying less capital gains tax and less accounting fees.
• What is the market value of the property? If a R700 000 property is transferred to an individual, the transfer fee is about R18 644.  If the property is transferred into a trust or a company, the transfer fee will be about R64 664.
• What are the accounting fees per annum of the entity?  If you are paying R5 000 per year for financials and submitting of tax returns, then one should compare these costs to the transfer fees. If a property is kept for 10 years or longer in the entity’s name, you will pay a minimum R50 000 in accounting fees. You should compare this cost with the tax saving and the legal transfer fees!  If the R700 000 property is in a Close Corporation or in a company and you intend to hold the property for more than 5 years, it is advisable to transfer to an individual. The transfer cost will be much less than the 5 years accounting fees. If you are thinking of transferring to a trust, then the intention to hold should be a bit longer. You should also check the beneficiaries’ individual tax rates before making this decision!
• How much is your personal marginal tax rate? If you pay 40% on any additional income, you have to compare that with the Company’s tax rate of 28%. The only way to distribute it to the members is to declare a dividend. But this will trigger another tax called Secondary Taxation on Companies (STC) (which is currently in the process of being replaced by a dividend withholding tax), that is levied at 10% on any distributions made to members.
• Are you using the property as your primary residence? If you are it is much easier to answer this question because the tax saving could be much more if the property is in your own name.  Transfer is however still not advisable if you are going to sell after a short period of time because transfer costs have to be paid on the property that you are transferring into your private name.  If you transfer from a company or cc and into your private name you have to pay transfer duty again.

In making the decision one needs to also take into account estate duty.   Each person’s circumstances are different and that is why property investors should discuss their personal scenario with a Tax Consultant.