How to fit a company between your trust and its properties
So, your trust owns investment properties and is liable for 45% tax on the net income. You read my article about how this should have been structured. Is it too late to put it right? Fortunately, it can still be done thanks to s42 of the Income Tax Act. You need to do an asset for share swap.
Here’s how it works –
You need to slip a company between the portfolio and the trust. Ideally, it needs to be a company that you newly form. Then the first issue of shares is in favour of the trust in exchange for the property portfolio. Section 42 allows this asset for share swap to be free of all taxes (Transfer Duty, VAT and CGT). Note that the shares must be newly issued, not transferred from another shareholder, that’s why you form a new company.
So what are the costs? Firstly the cost of forming the company which is about R2 000 and secondly the Conveyancer’s fees to transfer ownership of each property to the company. If the properties are bonded, then the bonds will have to be renegotiated and there is usually a cost involved.
Considering the significant reduction in tax rate from 45% to 28%, the costs are usually worth bearing.