While government had intended to boost its tax income from wealthy buyers with the introduction of transfer duty and capital gains tax (CGT), it has actually had the opposite and stifling effect on the upper end of the market. The property sector is overtaxed. You've got transfer duty, agent's fees, lawyers and CGT. In some instances the transaction costs can run as high as 20% of the purchase price, but add no value to your investment.
Buyers are therefore simply saying, why should I move? These high costs are taking away from the momentum that the market could have in terms of people buying and selling. Government should cut transfer duty by 50% if not altogether, or keep transfer duty and do away with capital gains tax, but we cannot have both because it is a double burden.
Decline in top-end market buying
This will boost transaction volumes and with that, higher income for the fiscus. What we have seen since the introduction of the higher transfer duty at the upper price ranges three years ago along with an increase in the CGT rate, is a notable decline in buying at the top end of the market; not just fewer transactions, but wealthy buyers are spending less per transaction compared to the mid- to late 2000s.
This has been compounded by the poor economic and policy climate. Upper income buyers are thinking twice about whether they want to transact and pay out millions without getting any value in return. Rather, they are opting to stay put and upgrading their residence to suit their needs.
Those who do buy are putting less into SA property and investing the balance into alternative investment vehicles, including offshore property, where they are perhaps earning lower yields than what they could have achieved from a good local property market.
This has also impacted foreign buyers investing in second homes. They are subject to these same laws and costs which serve as no incentive to investing here, rather than in some alternative second home markets, thus making SA an increasingly less attractive option. The rise of Airbnb has also made second homes less attractive, hence any added costs such as high taxation should be seen as a disincentive to investing in the SA property market. Foreign buyers are now also spending less per transaction with the high value sales being the rare exception.
Impact of transfer duty, capital gains tax
To illustrate, here is the impact on a R20m property.
Assuming a primary residence owned in a personal capacity, with the owner earning about R4m per annum. The property was purchased for R10m five years ago and the owner spent R1m on allowed costs and now sold it for R20m. The approximate CGT would amount to R2.9m. Say, he/she now buys again for just under R30m, this will attract transfer duty of around R3.5m.
Between CGT and transfer duty, that is about R6.4m, or just over 20% of the purchase price of the new property before adding in the additional transaction costs such as estate agency commission and other costs of moving.
Cutting the costs of these two taxes would no doubt incentivise more transactions and stimulate the market. The opportunity cost lost on this single example demonstrated above is significant, and you would need to sell a considerable amount of lower valued properties to make up for the loss in transfer duty and CGT. There is thus a strong case for government to relook at the taxation in the residential property sector.