Estate planning: The family farm is now held in my elderly father’s name (owned seven years). It is currently not profitable. We would like to know the tax implications of transferring the farm into a company at the lowest possible value. We are not looking at a trust, as the farm will be used for various projects.
When considering the transfer of a farm from an individual’s name to that of a company, various tax implications need to be considered to ensure no unforeseen tax liabilities arise due to the transaction.
The first consideration to take into account is how the transfer will be effected. The options will be for the individual to either donate the farm to the company or to enter into a sale agreement with the company.
Should you consider donating the farm to the company, donations tax will be applicable to the transaction. Donations tax is leviable at a flat rate of 20% on donations up to a cumulative value of R30 million and at a rate of 25% thereafter. Individuals receive an exemption on the first R100 000 donated in any tax year. The person making the donation (donor) is liable for the tax but if the donor fails to pay the tax within three months of making the donation, the donor and donee are jointly and severally liable for the tax.
The question that arises is how the farm needs to be valued for donations tax purposes. The owner of immovable property on which a bona fide farming undertaking is being carried out in SA can determine the market value by reducing the price, which could be obtained on a sale between a willing buyer and willing seller dealing at arm’s length in an open market by 30%. The value used for donations tax purposes is therefore 70% of the normal market value.
Below is an example of how donations tax will be calculated when donating farming property on which a bona fide farming undertaking is being carried out.
Example of donations tax calculation
|Value of farm on a sale between a willing buyer and willing seller dealing at arm’s length||R10 000 000|
|Less 30%||R3 000 000|
|Value for purposes of donations tax||R7 000 000|
|Donations tax payable by the donor (ignoring the R100 000 donations tax exemption)||R1 400 000|
Donating the farm will also have capital gains tax implications.
Important to remember is that the reduced valuation method can only be applied to determine capital gains tax if the farm was acquired by your father seven years ago by way of inheritance, donation or a non-arm’s length transaction and was acquired at the reduced valuation. This requirement was brought in to ensure that a similar valuation method is used to determine the value at which the property is disposed as well as how it was acquired.
An alternative to donating the farm to the company will be a sale transaction. Working on the assumption that the company to which the farm is to be transferred can be seen as a connected or related party, and as such the transaction is a non-arm’s length one, and that the farm was acquired by your father by way of inheritance, donation or non-arm’s length transaction, the same reduced valuation method as described above can be used to determine the sale price.
If the transaction does not qualify under these conditions, the farm will have to be sold at its market value.
If the sale price is below the market value, the difference between the sale price and the real market value can be seen as a donation and will attract donations tax on this portion.
The benefit of using a sale transaction as opposed to a donation is the avoidance of donations tax. Typically when a sale transaction like the one described above is concluded, a loan account is created between the seller (your dad) and the company. This loan account will remain an asset in your dad’s estate and will be included as an asset in his deceased estate one day for purposes of determining estate duty liability.
As can be seen from the above, whether or not the transaction can be done using the ‘market value less 30%’ method will depend on various factors and it is best to get the help of an experienced tax practitioner when deciding on the best way forward.