Have you heard the saying “location, location, location” when it comes to property? My parents own a beach house and years ago one of their friends came to visit and spent the night. The next morning, the man stood on the stoep with his coffee, looking out over the ocean. He turned to my mother and said: “It’s a crummy house, but what a location!”
When a client informs us just before the end of the financial year that they are planning on selling a property, they often tell us not to worry about the tax consequences for the current tax year, as the property will not be transferred before year-end. That is exactly when we start to worry….
The first question we ask is on what date the contract (deed of sale) was signed and if there are any special or suspensive conditions. This would for instance be the case if an offer is subject to the buyer’s financing being approved. The reason for this question is that the Income Tax Act states that you need to pay the tax when income is received or accrued, whichever happens first.
The proceeds from the sale of fixed property, and therefore the related capital gain, accrues on the date that the contract is signed, unless there is a suspensive condition. In that case, accrual takes place on the date that the condition is met, for instance the date on which the buyer’s application for a bond is approved. For tax purposes, this is the effective date. Full stop, end of discussion.
The requirement that transfer of ownership must be registered at the Deeds Office is not a suspensive condition. For tax purposes, this is merely regarded as a formality.
If the terms of a contract are met, let’s say 30 January, and the transfer is only completed on 2 March (so you will only receive the payment for the property on or after the 2 March), the transaction is considered to have taken place on 30 January for the calculation of tax. You will therefore need to take the capital gain into account for your IRP6 provisional tax payment at the end of February. This can have a significant cash flow impact.
So, when you purchase a property the location may be the most important factor, but when it comes to selling, it is all about the right timing for tax!
Petro van Deventer