Should I pay myself a salary, a dividend or draw down on my loan account? Vital information for ALL entrepreneurs. • Salary vs Dividend vs ...
In the first scenario the property in owned your personal name. If you live in the property it is considered to be your primary residence. This is good news from a tax perspective, as the first R2m of profit you make on the sale is exempt from Capital Gains Tax. However, this exemption does not apply to second properties you own in your personal name as they are deemed to be investment properties and will be taxed at 18% CGT when you sell it. This is still less than the 22% CGT if the property was held by a company.
Another important tax consideration for homeowners is the tax deductibility of bond interest. If you live in the property, the bond interest is not tax deductible. But, if you choose to rent out your investment property, you are able to deduct the bond interest as well as other costs such as insurance, rental agent fees, and rates as expenses. The net rental income is then added to your personal income (salary included) and taxed at your marginal income tax rate. It is a good idea to ascertain which ownership entity is more tax efficient; your personal capacity or a company.
Given these considerations, if you own only one property which is your primary residence, it may be beneficial to register the property in your personal name to take advantage of the R2 million CGT exemption when you sell the property.
2. Company
The second scenario is to own a property in a company. The first benefit is that of limited liability which means that your assets are separated from your personal liabilities. This protects the property from unforeseen financial events such as insolvency as the property cannot be attached by the courts as it is held in a separate legal entity and not in your personal capacity. However if you have signed personal surety or are the shareholder of the company owning the property this protection falls away. This is where the company shareholding of a Trust can play a role but more on that later.
If the company is VAT registered you can claim back the transfer fees for commercial, industrial and short-term rental properties (maximum of 20 days), but not for residential properties. Additionally, if the property is newly built and bought from a VAT registered developer, there is no transfer duty as by law it must be included in the purchase price. I must mention that when buying from a VAT registered developer the transfer fee exemption applies to all three forms of ownership.
There are other tax incentives specifically for companies such as Section 13sex and the Urban Development Zone which are designed to encourage investment in new property developments. These can be very beneficial for the investor as it can increase the ROI by 3.5% or put other way; over a ten-year period 55% of the value of property is exempt from taxable income which effectively means you get 23% of the property for free, but these benefits only apply if you meet their criteria and the property is held in a company.
More sophisticated investors who take a long-term view, structure their property portfolio in such a way that their company owns the properties and the shareholding of the company is held by a Trust. This structure ensures that the properties are not part of the individual’s estates, which can be beneficial from an estate planning perspective as it does not attract so called inheritance tax. The downside is that these structures are more costly to maintain especially in terms of accounting fees.
There is further complexity to property ownership in a company which relates to getting the money out of the company and into your name. This can be done in one of four ways namely; Loan accounts, dividends, salaries or a combination of the three. This is vital information that every business owner must understand. I have made a separate video on this topic and left a link in the description.
The alternative is to keep the profits in the company and continue to purchase more properties. Once you have reached this level of investing, tax efficiency plays a greater role in your investment strategy.
Assuming you are fortunate enough to own multiple properties, it can be hugely beneficial to own them all in the same company. You can now push all related expenses through this business which in turn lowers the tax liability. In addition to the previously mentioned tax incentives, the company may also qualify for the small business tax incentive provided you meet the SARS criteria and the properties are not residential in nature. So, if you're looking for a tax-efficient way to own multiple investment properties, the company option may be worth considering.