Differentiating between Capital Gains Tax and Income Tax in a property fund

[Raizon.I.T.]

Hi guys,

I am getting involved in a residential property fund and am building an Excel model to forecast portfolio returns over a 5-year period, factoring in upcoming acquisitions and disposals.

Question: How does SARS determine whether disposals are capital or inventory in nature?

Is there a defined period of time that I need to hold an asset for to deem it capital and not inventory?

I have done my calculations assuming that I will be subject to CGT on disposal, however have a concern that the disposals will be deemed as revenue and hence taxed accordingly.

Would appreciate any advice at all from those who have experience and/or expertise relating to this matter.

Many thanks,
J

 

[AchmatK]

On mobile so very brief.

You determine how SARS should treat it based on what you put in your tax return. It is then up to SARS to either accept your tax return or reject it. They will need to provide reasons for the rejection which you can then take up on appeal.

Basically SARS will determine what your intention was in acquiring the shares. Normally shares must be kept for a predetermined amount of time before it can be regarded as capital. There are however exceptions to this and every transaction must be judged on it's own merits.

 

[bchip]

It depends what your referring to holding the funds as an individual or
from the company's point of view with buying/selling property.

CGT applies to something thats not really in the normal business income, so for an individual
their salary is revenue and buying/selling a property only happens once in a while (so its CGT)
But a company that buys and sells property and thats their only income and sole purpose then everything around that will most likely fall into revenue nature.

However I will add that it might be possible, if there are very few sales, that you could
get away with a capital nature argument. You would also have to word your "intentions" of
the company very carefully.
Just know that if you have 1 or more sales every year, it is definitely revenue, but if
you are doing this for a "buy-and-hold" it could be possible to argue capital nature.

Sorry I cant be more conclusive, I would have to research this more / and would
need some more facts around the company.

 

[Raizon.I.T.]

It depends what your referring to holding the funds as an individual or
from the company's point of view with buying/selling property.

However I will add that it might be possible, if there are very few sales, that you could
get away with a capital nature argument. You would also have to word your "intentions" of
the company very carefully.
Just know that if you have 1 or more sales every year, it is definitely revenue, but if
you are doing this for a "buy-and-hold" it could be possible to argue capital nature.

Thanks very much for the feedback Bchip - really appreciate it.

To answer your questions:

1. It's a private company, not individual

2. The company intentions are to "buy-and-hold" or "buy-to-let", so the purpose is to build a strong balance sheet that generates income.

However, I realise that in order to grow the fun, assets will have to be disposed in order to free up cash flow or financing for new acquisitions. I may very well dispose more than one asset a year, so what you're saying makes me think I should use the full company tax rate in my financial forecasts as opposed to the effective CGT rate.

Do you have any further input now that I have extrapolated a bit above?

 

[bchip]

Ive seen a similar situation with stocks where the "intent" is to build a portfolio producing dividends,
the sale of the stocks are seen as capital in nature. However in that situation the sale of stocks
did not happen regularly, 1 stock sold in 2 years.
The sale only happened recently so SARS hasnt had a chance to contend or approve it yet.
However in theory (with either shares or property portfolio) it should be seen as capital nature but considering in your situation that you mention that will dispose of at least 1 property a year I doubt the capital argument would apply.

Because its so frequent, most likely revenue nature will apply.
Which means that you have 1 of 2 options (Im sure theres a couple people here much smarter than me that have some other views) but off the cuff,
1) Do the calcs on revenue nature
2) Push out the sales of property so that it becomes more infrequent.

Also make sure your calcs regarding CGT is different in a company than with an individual (ie they are at different rates,
just make sure you are using the right rate as company's CGT is higher)

Some other pointers though is that if costs are of revenue nature it does mean that items that werent previously
deductible suddenly become deductible - something to take note of.

And you can also double check your calcs to make sure youve got all your expenses forecasted:
http://myshares.co.za/wp/2015/08/04/property-points-location-location-lo-costs/


I tend to stay away from property as investments as it's heavily burdened with costs.