INTRODUCTION

The past few years have seen enormous growth in the property market.  We have also seen a large number of people entering into the property market and purchasing second and third properties as investment properties.  These new entrants largely see themselves as property investors.  The danger for some of these property investors is that SARS may view them as property speculators.

INVESTOR vs. SPECULATOR

The difference between an Investor and a Speculator is one of intention. The difference could also have far reaching and expensive tax implications.

An Investor is an individual who acquires the property with the intention of holding the property as an asset in order to rent it out and produce a future flow of income.  The property is purchased as a capital asset.  When the Investor sells his capital asset he will be taxed with Capital Gains Tax which is effectively in the region of 10% of the capital gain, depending on whether the taxpayer is an individual or legal entity

A Speculator on the other hand purchases the property with the intention of making a profit by selling the property.  The property is not regarded by the Purchaser as a capital asset but is rather regarded as trading stock which will be sold at a profit.  The profit achieved here is of a revenue nature.  When the Speculator sells the property he is selling trading stock and will be taxed at his marginal income tax rate and a maximum of 40% of the gain.

It is clear that the tax implications can severely affect the profit generated from the property investment.

THE TEST

In determining the outcome of various disputes as to whether a property purchase was of an investment or speculative nature, our courts have advanced various tests.  The dominant test is to determine the “intention” of the taxpayer.  A major factor the courts will look at is the intention of the taxpayer at the date the property was acquired.  In other words was the intention to purchase the property and hold it as a capital asset or was the intention to purchase the property and sell it in order to make a speculative profit.

The dominant intention test is aptly named.  The activities of the taxpayer are looked at holistically and the dominant intention determined.  Additional factors the courts may look at are factors such as how long the property was held for, the explanation for and method of selling, how the taxpayer has treated other properties, the main business or profession of the taxpayer and how the property was purchased.

The courts do recognise that the taxpayer may have a change of intention. Such a change of intention would have to be properly motivated.  Individuals should not take it for granted that where they purchase a property for investment and then sell that same property shortly after purchase for a large profit, the courts will easily infer a change of intention.

CONCLUSION

The onus of proving the intention of the taxpayer will always rest on the taxpayer.  Caution must be exercised as SARS will levy penalties against those taxpayers who attempt to mislead SARS in their tax returns.  A word of advice would be to treat your property investments as a business in the sense that prior to embarking on various acquisitions, a business plan be drawn up in order to record your intentions.  The business plan should be updated on a regular basis to record new developments and any change of intention.

The above comments are merely a guide to what is a complex tax issue and one where individuals are advised to seek expert advice.

WEBSITE DISCLAIMER: Save for the contents of this disclaimer, the content of this website is provided for general information purposes only and should not be construed as, and does not constitute, legal or other professional advice. To the extent that you wish to place reliance upon any information contained on this website, you do so totally at your own risk and we accept no responsibility for any loss or damage whatsoever, howsoever arising. In addition, the hyperlinks provided on this website are provided for convenience only. We make no representations or warranties whatsoever in respect of the accuracy, completeness and/or reliability of any information, opinions, data and/or content provided on such linked website, nor do we endorse or take any responsibility for the content of any such linked website.