Investors (often where there is more than one investor) in commercial or industrial property often opt not to purchase the property directly into a trust, but set up a structure whereby a shelf company or a close corporation (‘CC’) purchases the property, and the investor’s proportionate share of the company or members’ interest in the CC is held by his or her trust. Tax Partner at Cameron & Prentice Chartered Accountants, Dave Warneke, explains just what’s involved.
This structure enjoys many of the same advantages compared with the holding of the property by the trust directly. These include protection from creditors of the investor and savings on Estate Duty. However compliance costs are not as low as in the trust – only scenario: companies are subject to statutory audit and CC financial statements require accounting officer signoff.
There is also less flexibility in that, compared with the holding of the property by the trust directly, there is less tax arbitrage opportunity. The company or CC pays tax at its fixed rate of 34.55 % on revenue and 21.82 % on capital gains (these are the effective rates of tax for the 2009 tax year, including dividends tax) and thereafter distributes the after tax profits as tax free dividends to the trust. The trust then on-distributes these dividends, once again as tax free dividends, to its beneficiaries. A tax arbitrage benefit can arise if the trust realizes a capital gain by selling its interest in the company / CC. This gain can be passed to whichever of the trust’s beneficiaries the trustees nominate. As a result the beneficiary accruing the gain will be taxed on it at his or her marginal rate of tax (a maximum effective rate of tax of 10 %, compared with the trust’s effective rate of 20 % of the gain).
Where there are multiple investors, each investor can hold his or her member’s interest in the company or CC through his or her family trust. This structure is generally preferable to the trust-only structure for the reason that the rights and obligations associated with management and ownership are more clearly prescribed in the case of companies and CCs than in the case of trusts, thus providing more certainty where disputes arise.
In order for trust / CC structure (as opposed to the trust / company structure) to be possible, various requirements need to be met – these are contained in the Close Corporations Act. The most important of these are that no juristic person can be a beneficiary of the trust and that the total number of beneficiaries of the trust and members of the CC, when added together must not exceed 10.
Where there is only one investor, there is no reason why the trust-only structure cannot be used in the case of commercial or industrial property. Usually the property is purchased from a registered VAT vendor and is therefore subject to VAT (not Transfer Duty). The trust registers for VAT and claims back the VAT charged by the seller.