Real Estate Investor Magazine South Africa February/ March 2020 | Page 57

I
n the previous article, we discussed the importance of
having the correct legal structure in place for your proper-
ty portfolio. We discussed two recommended structures,
namely in a company with the shares held in a trust or in a
trust directly. Now, whether you invest in a company with
the shares held in a trust or in a trust directly, both of these
approaches have their advantages and disadvantages.
You will see that even if you go with the company route, the
company needs to be owned in a trust. According to Bruno
Simão from Bruno Simão Attorneys, one of the fundamental
structuring principles is asset protection, in that you do not
want to own any assets or have any liabilities in your own
name - no assets, because you may leave them exposed and
no liabilities, because this is usually the cause of such exposure.
Therefore, even if you invest through a company, from a
protection perspective, because its shares are an asset, it is best
if the company is owned by a trust (free of liabilities) and not by
you directly, thus protecting the shares.
“Another great advantage
of using the correct legal
structure is significant tax
advantages.”
A pros and cons list is probably one of the best ways to make
good decisions with your property portfolio. We’ve mentioned
a few of the advantages and disadvantages of legal structures
in this article to help you make informed decisions. First up,
we’ll look at the advantages of using trusts and companies in
your legal structure.
Advantages:
One of the advantages that we discussed in our previous article
is that you can build a significantly bigger property portfolio
by using the correct legal structures. Buying properties in your
own name is limiting but using a company or trust to buy your
properties allows you to buy unlimited properties possibly.
Some of the greatest advantages of making use of a trust in
your property portfolio, whether it is buying properties directly
in a trust or having the trust hold the shares in your company,
is that it protects your assets should something ever happen to
you. According to Dolf Schutte, a Fiduciary Specialist at Citadel
Fiduciary, using trusts is also excellent for estate planning to
reduce estate duties, executor’s fees, capital gains tax, and
even, in some instances, transfer duties to a minimum since
the ownership structure does not change after you pass away.
Another great advantage of using the correct legal
structure is significant tax advantages. Both approaches,
owning property in a company with the shares held in a trust
and owning property directly in a trust, have their own tax
advantages. And although the tax rate of a company is lower,
you can reduce taxes to a minimum in a trust, unlike when a
property is owned in a company. This will be discussed in detail
in the next article in the series.
As with all things in life, there are, unfortunately, also
disadvantages to using trusts and companies in your legal
structure. We’ve mentioned and discussed them below.
Disadvantages:
One such disadvantage is the company and trust registration
costs. Trusts can cost anywhere between R5,000 and R10,000 to
set up and companies anywhere between R1,000 and R5,000.
Then there are also the monthly or annual administration costs.
These are fees that need to be paid monthly or annually for the
independent trustee for the trust administration, preparing
the annual financial statements, submitting tax returns, as
well as bank charges. Trust administration can cost anywhere
from R2,000 upwards per year, and the preparation of annual
financial statements and tax submissions can also cost
anywhere from R2,000 upwards per year per entity. However,
when you have multiple entities, these fees can decrease per
entity. Bank charges can also be up to another few hundred
rands a month.
“The bottom line is, if you
want to be a successful
property investor, structuring
is the only way you can do it,
so start building today!”
There is also more administration applicable when your
legal structure includes trusts and companies (which is not
always bad as these things should be in place) because annual
financial statements need to be prepared and tax returns need
to be submitted for each entity. A trust also needs to have
an independent trustee to ensure the trust is managed in a
compliant manner, and resolutions need to be signed by all
trustees every time a decision is made that affects the trust.
Unfortunately, there may also be some negative tax implications
on loans that are made to a trust or company with the shares of the
company held by a trust, which is another disadvantage.
Section 7C of the Income Tax Act refers to one such negative
tax implication. According to Section 7C of the Income Tax
Act, the interest deemed to be earned by the individual on
a loan made to a trust or company, based on an interest rate
percentage determined by SARS, has to be taxed.
According to Robin Galloway, a tax manager at Mazars, “It
was common practice in the past for a trust to obtain assets
by way of an interest-free or low-interest loan from a natural
person. The objective of Section 7C is to tax qualifying loans,
issued by related parties such as founders, beneficiaries etc.,
to trusts, if these loans attract interest at a rate lower than the
official rate of interest which is currently 7.75%.”
There are, however, a number of exemptions that one can
apply to reduce the taxes significantly or even get it to zero,
which we will discuss later in the series. The bottom line is, if
you want to be a successful property investor, structuring is the
only way you can do it, so start building today!
For more info go to prosperityenterprises.co.za
JACO GROBBELAAR is a property investor,
structuring specialist and international speaker.
He founded Prosperity Enterprises to help equip
individuals in building their property portfolios
through education, structuring and support.
SA Real Estate Investor Magazine FEBRUARY/MARCH 2020
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