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Increase with effect from 1 January 2005

Landlords, tenants and estate agents enter the new year with a jolt. Stamp duty on leases has been doubled with effect from January 1, 2005. Bill Rawson, president of the Institute of Estate Agents says that, although the necessary legislation has not yet been gazetted, the SA Revenue Service has gone ahead and implemented it, and apparently without prior warning to the public or the property industry: the people who actually calculate and pay the stamp duty. Yet, if they do not stamp leases according to the new formula, they are liable to be charged a penalty and additional duty of up to 200%, even though the law has not yet been published for public information and compliance.

In addition to the increase in the rate of duty, the new law extends the period for stamping from 21 to 30 days, exempts leases from stamp duty if the duty works out to R200 or less, and provides for the payment of additional stamp duty annually if the tenant is required to pay other amounts, such as rates and taxes, in addition to rental.

"We have two serious issues with this," says Rawson. "Firstly the increase in stamp duty is 100% or more, which is far above the inflation rate. How is this justifiable, especially when the people who are going to be hit the hardest are going to be residential tenants, many of whom are tenants because they can't afford to be owners?

"And secondly, how legal is it to implement a law - and to penalise people for non-compliance - before it has been gazetted? Whose fault is it that the law was not gazetted in time? And why was some kind of announcement not made to warn people that the new stamp duty formula was coming into effect?

"We think the way in which this has been introduced is very unsatisfactory, but there it is and unless a higher authority compels SARS to hold fire until after the Act has been gazetted - which doesn't seem likely - the new formula is now a fact of life and people had better start getting used to it to avoid being penalised from February 1 onwards."

The landlord remains responsible for paying the stamp duty. It is, however, common practice, for the tenant to reimburse him. The period in which the document must be stamped has been extended from twenty-one days to thirty.

The stamp duty on a lease which is signed by the landlord on or after January 1, 2005 is 50c per R100 or part thereof, i.e. 0.5%, of the dutiable amount. The new rate applies regardless of the duration of the lease.

Until December 31, 2004, there were different rates of duty for leases of less than five years (0.25%), and for those running for five to ten years (0.4%), ten to twenty years (0.55%), and twenty or more years (0.7%).

"Changing to a flat rate may benefit people signing long-term leases," says Rawson, "but they would mostly be commercial and industrial leases. Your average residential lease is for six months or a year, and so, as usual, it is your man and woman in the street who is going to bear the brunt of the increase.

"Fortunately," says Rawson, "there is also a slight measure of relief. If the stamp duty amounts to less than R200, then the lease will be exempt from duty. That represents a dutiable amount of R40 000 which would mean a short and fixed lease period and/or a low rental."

Rawson says it is important to note that the dutiable amount is no longer the rental alone, but now also includes any other considerations, such as rates and taxes, for which the tenant will reimburse the landlord in terms of the lease. If the lease provides for the tenant to make improvements to the premises at his expense - not uncommon in commercial leases, for instance - then the value of those improvements must also be included in the dutiable amount.

If another consideration is payable, and the exact amount is known at the time that the lease is drawn up, then the stamp duty must be paid on the full value, i.e. the rental plus the consideration. However, if the amount of the consideration cannot be determined in advance, then the stamp duty must be paid on the rental, and the stamp duty on the consideration must be paid later, after the end of the tax year, based on how much was actually paid.

"This," says Rawson, "suggests that many leases are going to be stamped in stages: an initial stamp duty on signature, and additional amounts each year to keep up with the other considerations paid by the tenant during the year.

"Many people rent a home for an initial period of six months, with provision to continue living there indefinitely until they or the landlord give notice. Assume a rental of R3000 pm for the first year and 10% annual escalation, and assume too that the tenant agrees to reimburse the landlord for rates and taxes, but the exact amount is not known in advance.

"The stamp duty on that lease used to be R297.90, and that was that. Now, under the new formula, duty of R595.80 will be payable within 30 days of signing the lease, to cover the rental. Then, after the end of the tax year, additional duty will be payable on the rates and taxes actually paid by the tenant during the course of the year. Additional duty will be payable the following year, and so on for as many years as the lease runs."

Rawson says this will make landlords' and letting agencies' administration and accounting more complicated, and he wouldn't be surprised if letting agencies raise their fees to cover the additional work. The landlords would have to pay the fees but would no doubt recover them from the tenants – who might even have to pay stamp duty on them if they are regarded as "other considerations" for purposes of the Act!

Alternatively, he says, more people might prefer to have unwritten leases. Although these are just as legal as written leases, he says, and have the advantage of being duty-free, they are dangerous because in the event of a problem or a dispute, it is one person's word against another's and there is nothing hard and fast to fall back on. The Institute is not in favour of unwritten leases.

Rawson points out that the old provision that if the dutiable amount of a lease exceeds the value of the property, then stamp duty should be calculated on the property value, has been abolished.

Because the decision to implement the new system on January 1 was not properly announced in advance, hundreds of leases may already have been drawn up since then and stamped at the old rate. The Institute recommends that landlords and estate agents should, as a matter of urgency, re-calculate the stamp duty on those leases at the new rate, otherwise the landlords will be liable for penalties, interest, and even additional stamp duty of up to 200%.

"But on no account should anyone try and backdate a lease, or look for other ways to circumvent the change in stamp duty," says Rawson. "That would be a form of tax evasion, which would render any estate agent and landlord and tenant involved liable to be reported to, and investigated by, the Financial Intelligence Centre for conducting a 'suspicious or unusual transaction'."

Enquiries about the new stamp duty: phone your local SARS office.

Please note: Do not contact the IEASA for further information/explanation as IEASA is not qualified to answer questions on behalf of SARS.

Press release: Bill Rawson - IEASA National President





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© Christoph von Kalckreuth, Kapstadt, Südafrika 2005