Stamp Duty Update
Posted on January 19, 2015
And/or nominee contracts
It is common practice for many land contracts to name the purchaser as ‘Bob Smith and/or nominee’. At settlement, the land is then transferred to someone else (‘Ultimate Purchaser’).
If the Ultimate Purchaser has, prior to the date of the contract, appointed the named purchaser to enter into the contract on their behalf, no additional stamp duty is payable when the vendor transfers the land to the Ultimate Purchaser instead of the named purchaser. Such an appointment is normally done under a document called a Letter of Agency.
If the Ultimate Purchaser has not signed a Letter of Agency, then a Deed of Assignment is required to transfer the rights under the contract to the Ultimate Purchaser. Stamp duty is payable on the amount of the deposit plus any additional amount that the Ultimate Purchaser may pay e.g. a premium.
These practices resulted in extra administrative work and in the case of a Deed of Assignment, payment of extra stamp duty.
On 16 January 2015, Revenue SA released a ruling where, in the above circumstances, a Letter of Agency or Deed of Assignment is no longer required. Revenue SA acknowledge that a purchaser has a common law right to direct the vendor to transfer the land at settlement to any person the purchaser desires, irrespective of whether the contract states ‘and/or nominee’.
A person can now enter into a contract and direct the vendor to transfer the land to another person at settlement without the need for a Letter of Agency or Deed of Assignment and without any extra stamp duty.
However, purchasers should consider whether in the particular circumstances a Deed of Assignment is prudent or desirable, for example, to protect the purchaser with regard to an unrelated assignee or to conform with the contract or the requirements of a vendor.
Revenue SA have not stated whether their view is applicable to contracts other than land e.g. for the purchase of a business or shares.
Consideration for the sale and purchase of a business
Also on 16 January 2015, Revenue SA released a ruling addressing the amount of stamp duty payable on a contract for the sale of a business.
Any contract that is liable to stamp duty, including a contract for the sale and purchase of a business, is liable to be stamped at the higher of market value or consideration.
In most cases, Revenue SA accept that ‘market value’ means the amount specified in the agreement as the purchase price. Exceptions may apply where the parties are not dealing with each other at arms-length.
Consideration is not necessarily the same as the purchase price. It includes any other money or value which forms part of the transaction. A common source of consideration is the assumption of liabilities by the purchaser. The most common example is employee entitlements. Purchasers usually assume liability to pay some accrued personal leave, annual leave and long service leave. Revenue SA provide the following example of how stamp duty is calculated in such instance:
A sale agreement provides that a business is to be sold for $200, with the purchaser taking on the vendor’s employees and their entitlements as at settlement. The sale agreement further provides that the total purchase price at settlement is to be reduced by 70% of the value of the outstanding employee entitlements assumed (the percentage reflecting the purchaser’s entitlement to an income tax deduction for the annual leave expense incurred). At settlement, the total employee entitlements are $10. The reduced purchase price is therefore $193. The consideration upon which duty is calculated is $203, comprising the $193 purchase price paid and the assumed employee entitlements of $10.
Other sources of consideration are additional amounts payable for stock, usually determined at a stocktake 1 or 2 days before settlement. Another source is the purchase of a business where some or all of the purchase price is to be determined after settlement e.g. earnouts.
This position taken by Revenue SA is correct at law. However, it has been common for many business sale agreements to be stamped at the purchase price in the agreement without regard to extra consideration. It is this practice that may have prompted Revenue SA to release this ruling.
How Lynch Meyer Lawyers can help
Lynch Meyer Lawyers have a specialist team of tax lawyers that can provide advice on all aspects of stamp duty and other taxes. For assistance please contact Joe Subic.
