Section 2(1) of the Transfer Duty Actimposes transfer duty on the value of any property acquired by any person by way of a transaction, or in any other manner, or on the value by which any property is enhanced by the renunciation of an interest in or restriction upon the use or disposal of that property. Although on the face of it, the principles are straightforward, the transfer duty regime has several complex nuances.
The Transfer Duty Act contains an anti-avoidance mechanism which ensures that transfer duty is also payable on the transfer of shares where the property is housed in a “residential property company”, as opposed to directly in a natural person’s hands. However, the value of shares in a company could be much lower than the value of the underlying property. This will be the case where the company also has debts, loans or other mortgages. Here is an oversimplified example: the value of the property in the company is R100, while the company has liabilities to the value of R60, resulting in a share price of R40. If the property were held by a natural person directly, as opposed to through a company structure, transfer duty would be payable on the R100 value. The question then arises, on what value transfer duty will be payable when company shares are transferred? R100, being the market value of the property, or R40, being the market value of the shares?
Section 5 of the Transfer Duty Act prescribes that duty is payable on the following value:
- where consideration is payable by the person who has acquired the property, on the amount of that consideration; and
- where no consideration is payable, on the declared value of the property.
The same section determines that where the Commissioner for the South African Revenue Service believes that the consideration payable, or the declared value (as above) is less than the fair value of the property, duty will be payable on that fair value. Therefore, the fair value of the shares has to be established to ensure that the correct amount of duty is paid.
The definition of “fair value” in section 1 of the Transfer Duty Act notes that the fair market value of a share should be determined “without taking into account… any liability in respect of any loan…”. The fair value of the shares, therefore, ignore the value of any debts in the company.
No. 40 of 1949 (“the Transfer Duty Act”).