Bought a house for less than it is worth?

Dear MoneywebTax.co.za

We are in the process of buying a family property out of a trust. I would like to know if Sars can claim donation tax from us if the family agreed that we can buy the property for less than the actual worth of the property. We got consent from all family members to buy the property for R300 000. The estate agent valuated the property between R400 000-R700 000.

 Are we liable for donation tax?

Answer:
The income tax act provides for a donations tax exemption ((56(1)(l) of the Income Tax Act) if any property is disposed of under and in pursuance of any trust. The effect of this exemption is to ensure that no donations tax is payable when the trustees dispose of property in terms of a trust deed to any person.

Therefore, you need to establish whether the family trust deed permits such a disposal. If so, this type of disposal will not attract any donations tax payable by the trustee.

However, there are other tax consequences that may arise for the trust, namely capital gains tax.  In terms of the income tax act, the trust will be deemed to have disposed of the property at market value, despite the fact that the actual proceeds may be less.  This means that the trust may incur a substantial capital gains tax/ income tax liability from such a disposal, and, may be left cash strapped when it comes to paying such taxes (except if the taxable gain is vested in the tax beneficiaries).

*Madeleine Schubert is an attorney at Shepstone & Wylie's corporate & commercial law department.

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responses to this article

CGT What about the roll-over of CGT? by anon on December 11 2008, 10:36 Find this comment inappropriate? Report it

purchasing below market value Would not transfer duty be deemed to be paid on market value. by clive on December 11 2008, 11:00 Find this comment inappropriate? Report it

Property valuation Indeed you have not though this through. You need to tell the estate agent very clearly that they will not be getting a sale out of the deal and you want the property valued as for a fire sale ie if it had to be sold in 1 week what sort of true offers . .more would you get. It also helps to get the estate agent to charge you an hourly rate for their services to do the evaulation. They will value at what you indicate you think its worth ie 300k . .less by Mutt on December 11 2008, 17:05 Find this comment inappropriate? Report it

Fiduciary Responsibilties The Trustees are opening themselves to be sued by the beneficiaries, as well as contravening the Trust Property Control Act. 1.If it is sold below Market Value the beneficiaries have a claim against the Trustees 2. The Trust Property Control Act . .more states that Trust Assets must be sold or rented @ market Value. Rather do a distribution in terms of Sec 56 and no Tax is payable . .less by Woody on December 11 2008, 17:38 Find this comment inappropriate? Report it

AD WOODY MANY THANKS FOR YOUR POSITIVE COMMENTS.HOW ABOUT AN ARTICLE ON THE TAX IMPLICATIONS AND THE PROS AND CONS OF TRUSTS THAT ARE STILL AVAILABLE . by VIC on December 11 2008, 21:47 Find this comment inappropriate? Report it

@ Vic Thanks for the comment, I have a few and will send them to Moneyweb next year, I am busy with one on Trusts that hold Property. Trusts still have a place, but people need to understand how to run them. by Woody on December 12 2008, 06:24 Find this comment inappropriate? Report it

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