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South African Journal of Economic and Management Sciences

On-line version ISSN 2222-3436
Print version ISSN 1015-8812

S. Afr. j. econ. manag. sci. vol.21 n.1 Pretoria  2018

http://dx.doi.org/10.4102/sajems.v21i1.1951 

ORIGINAL RESEARCH

 

Exploring the South African tax consequences of a residential property lottery

 

 

Silke de LangeI; Danielle van WykII

IDepartment of Mercantile Law, Faculty of Law, Stellenbosch University, South Africa
IISchool of Accountancy, Faculty of Economic and Management Sciences, Stellenbosch University, South Africa

Correspondence

 

 


ABSTRACT

BACKGROUND: Disposing of a residential property by way of a lottery sounds peculiar, but a number of these transactions relating to residential properties in South Africa have recently taken place. As this is not an ordinary way of disposing of and acquiring residential property, it is submitted that it is necessary to explore the tax consequences resulting from such a transaction.
AIM: The objective of this article is to explore some of the most pertinent South African tax consequences of such a residential property lottery transaction, from the viewpoint of the owner ('seller') who disposes of the residential property and the winner ('purchaser') who acquires the residential property in terms of the lottery.
SETTING: This article examines existing literature in a South African income tax environment to explore the tax consequences resulting from a disposal and acquisition of residential property by way of a lottery.
METHODS: A non-empirical study, which entails the study of the various South African tax provisions and an application thereof to the facts of the lottery transaction, was conducted. A doctrinal research approach was followed within the realm of exploratory research.
RESULTS: Disposing of and acquiring residential property by way of a lottery results in a number of actual tax consequences, as well as a number of uncertainties regarding taxes (referred to as uncertain considerations.
CONCLUSION: The conclusion is reached that the possible tax consequences of such a transaction can create tax risks or can result in unintended tax consequences relating to inter alia income tax (including capital gains tax), transfer duty and donations tax. The insights provided in this article do not always result in conclusive answers but they may, however, result in further research to be conducted, and a number of such areas for further research were identified. Should residential property lottery transactions occur more frequently in South Africa in future, it is recommended that the South African Revenue Services (SARS) issues clear guidance on the tax treatment from the perspective of the owner and the winner of such a transaction to ensure that any uncertainties are dealt with correctly.


 

 

Introduction

Disposing of a residential property by way of a lottery sounds peculiar, but a number of these transactions relating to residential properties in South Africa have recently taken place. According to Tswanya (2015), one transfer of residential property situated in the Val de Vie Estate in Paarl and two transfers of residential properties situated in the Diemersfontein Estate between Wellington and Paarl took place in the form of a residential property lottery.

As such residential property lottery transactions are unconventional, especially in South Africa, no academic literature currently exists on the topic in South Africa. In the United Kingdom, for example, the Law Society issued a practice note titled 'House Competitions' in 2011 due to the increase of such transactions (United Kingdom Law Society 2011). It is stated in the practice note that this increase can be ascribed to factors such as an economic recession, which makes it more difficult for home-buyers to obtain financing and that home-owners are therefore trying to sell their properties by way of a competition in which the property can be won (United Kingdom Law Society 2011). The United Kingdom Law Society notes in the practice note that one of the risks associated with these transactions is the possibility of fraud by not paying the relevant taxes (United Kingdom Law Society 2011). It is submitted that similar risks associated with property lottery transactions exist in South Africa, but no similar guidance on such transactions and their consequences is currently available.

The terms and conditions of the lottery of the house situated in Val de Vie ('the Property') were evaluated for purposes of this article. As the Property is situated in South Africa, the objective of this article is to explore some of the most pertinent South African tax consequences of such a transaction from the viewpoint of the owner (the person in a position similar to a seller in a typical sale transaction) who disposes of the Property in terms of the lottery, and from the viewpoint of the winner (the person in a position similar to a buyer in a typical sale transaction) who acquires the Property in terms of the lottery.

To illustrate how the lottery works, the facts of the specific transaction relating to the Property, as noted by Tswanya (2015), and the lottery's terms and conditions are presented. The tax consequences discussed below are based on these facts: The lottery of the Property was administered in Austria by an Austrian attorney and 9999 lottery tickets or lots were available to be sold at 119 each. Payment for a lot had to be made into a trust account of the Austrian attorney. Once all the lots were sold, a draw took place and the winning lot won the Property, as well as a number of additional prizes, being the contents of the Property (such as furniture), two return flights to South Africa and accommodation for a week, including meals, tours and transport. A further promotional prize (a safari tour) was also available upon the condition that the winner agreed to have his or her name published, together with a photo and a follow-up story. The owner of the Property was only entitled to funds that equal the market value of the Property. The proceeds realised from the sale of the lots, however, far exceeded the market value of the Property. The proceeds realised from the sale of the lots, after deducting the market value that was paid over to the owner and after deducting costs, such as the costs of the transfer of the Property and the costs of the lottery, had to be paid over to a charity. Further specific terms and conditions relating to the lottery transaction will be referred to below, as those are relevant or applicable to a specific tax issue being explored.

In essence, the owner realises the full market value on the disposal of the Property but also obtains some additional benefits. It was stated by the owner that there are benefits from disposing of the Property in this way such as not being liable for estate agent commission (which is usually paid over by the owner to the estate agent from the sale price) (Tswanya 2015). Further, it was stated that selling the Property in this way has the benefits that the owner does not have to make the house available for viewings, that the owner does not have to consider any offers, and that the sale will not be subject to conditions such as the buyer's mortgage bond approval (Tswanya 2015).

The winner pays a fixed amount for the lot and, upon acceptance, acquires the Property with a substantially higher value in return together with some additional prizes and an optional promotional prize.

 

Limitations and assumptions

Focus is placed on exploring the tax consequences for both the owner and winner, and it is assumed that both are natural persons. It is, however, unknown whether the owner of the Property and the winner of the Property are 'residents' as defined for tax purposes. The tax consequences of a transaction often vary depending on the tax residency status ('resident' or 'non-resident') of the parties involved. The Income Tax Act 58 of 1962 ('the Income Tax Act') defines a resident as a natural person who is ordinarily resident in the Republic, or a natural person who is not at any time during the relevant year of assessment ordinarily resident in the Republic, if that person was physically present in the Republic for a prescribed number of days during the relevant year of assessment and the 5 years of assessment preceding that year of assessment (Section 1 of the Income Tax Act). It seems from the terms and conditions that the lottery was mainly aimed at selling lots to foreigners. This is clear from the facts as the additional prize includes air tickets to South Africa and because a participant in the lottery was required to be in possession of a valid passport and visa to travel to South Africa. However, 'participants from South Africa' also purchased lots (Tswanya 2015). The winner could thus either have been a 'resident' or a 'non-resident', and the same would apply to the owner. The discussion below however assumes that both the owner and the winner are 'residents' as defined.

It is further assumed that neither the owner nor the winner is a 'vendor' as defined in the Value-Added Tax Act 89 of 1991 and that the transaction therefore has no value-added tax consequences.

The scope of the article is limited to residential property only. Specific consequences, should such residential property constitute a person's primary residence, are addressed below. The provisions of the Income Tax Act relating to deductions for residential buildings, residential units and low-cost residential units (Sections 13ter, 13sex and 13sept) fall beyond the scope of this article. The article further focuses only on the tax consequences relating to the Property, and does not include a discussion on the tax consequences relating to the contents of the Property, the additional prizes and the promotional prize.

The legality or lawfulness of such a lottery in South Africa, or whether it is allowed for South African citizens to take part as owners or buyers of lots in such a lottery, falls beyond the scope of this article. It was reported that 'participants from South Africa are accounting for a good portion of the people taking part' (Tswanya 2015). For purposes of this article it will be assumed that a valid transaction was successfully concluded.

The terms and conditions of the lottery provide that the owner may decide to discontinue the lottery if participation is not sufficient, in which case the buyers of lots will be refunded. The discussion below is, however, based on the assumption that all the lots are sold and that the draw proceeds. It is further assumed that the proceeds from the sale of the lots will cover at least the market value of the Property, the costs of the additional prizes and promotional prize and all the other costs that are covered from the lottery takings and that an amount to be donated to a charity remains thereafter.

It is assumed that the charity to whom the donation is made is an approved public benefit organisation as contemplated in Section 30(3) of the Income Tax Act. It is not clear from the available terms and conditions who the donor of this donation to the charity is. It is, however, assumed that the donor is not the owner as the owner is only entitled to the market value of the property.

It should lastly be noted that all the tax aspects that are explored below could not be addressed comprehensively and in depth in this article. This creates opportunities for further research as referred to in the conclusion.

 

Research method and design

What are the most pertinent South African tax consequences of disposing of a residential property by way of a lottery for the owner and the winner? This is the research question this article aims to address, within the realm of exploratory research. The research objective of this article is to explore some of the most pertinent South African tax consequences of such a transaction as no such research currently exists and no specific guidance is available in this regard.

A non-empirical study, which entails the study of the various South African tax provisions and an application thereof to the facts of the lottery transaction, was conducted. Hutchinson and Duncan (2012) suggest the following steps to solve a specific research problem, referred to as a doctrinal research approach:

  • gathering the relevant facts

  • identifying the relevant tax issue at hand

  • analysing the issue from a tax perspective

  • studying relevant background material such as textbooks and journal articles, inter alia

  • analysing primary research sources such as case law and legislation

  • combining all issues within the context

  • reaching a preliminary conclusion.

The doctrinal research approach is embedded within the ambit of exploratory research in this article. Exploratory research entails focusing on research problems that have not been previously investigated (Brown 2006:46) and does not intend to provide a conclusive answer to research problems, but it can provide significant insights on the matter (Singh 2007:64). While it is acknowledged that the insights provided in this article do not always provide conclusive answers, it may, however, result in further research to be conducted. Exploratory research is therefore considered to be appropriate to this study.

The research objective was achieved by doing the following:

  • evaluating the facts of such a transaction as included in the terms and conditions of the lottery

  • identifying the capital gains tax, other income tax, donations tax and transfer duty issues at hand

  • analysing the relevant tax issues from the perspective of the owner and the winner

  • studying and analysing available resources such as textbooks, case law and legislation to explore the South African tax consequences

  • reaching a preliminary conclusion within the ambit of exploratory research.

Even though such property lottery transactions might not take place regularly, it is important to consider the tax consequences thereof as the benefits seem to be attractive upfront, although it might not necessarily be the case once the tax consequences are taken into account. This article should not be construed as tax advice on such a transaction, but should rather be seen as exploring some of the most pertinent tax consequences in order to establish tax risk areas or uncertainties, some of which could have been unforeseen, for both the owner and the winner involved in the transaction. The research is conducted in order to create an awareness of the most pertinent South African tax consequences of such a transaction, thereby creating opportunities for further research.

While some actual tax consequences are discussed, a number of possible but uncertain tax consequences are also highlighted in this article. These are referred to as tax considerations and are seen as areas of uncertainty with possible tax risks.

 

Results and discussion of the South African tax consequences and considerations

The tax consequences and considerations are discussed below in the following order. Firstly, the capital gains tax consequences for the owner are explored (considering the disposal of an asset by the owner on the transfer of the Property by way of the lottery), followed by the capital gains tax consequences for the winner. The capital gains tax consequences for the winner include a discussion of capital gains tax on gambling, games or competitions and a discussion of the base cost of the Property for purposes of a future disposal of the Property by the winner. Subsequently, other income tax considerations are explored for the owner and the winner respectively. For the owner, it is considered whether the fact that the owner decides to dispose of the Property by way of a lottery, instead of by way of an ordinary sale, could result in the owner moving over from the realisation of a capital asset to a scheme of profit-making. It is also considered whether the savings or advantages relating to the disposal of the Property by way of the lottery (compared to an ordinary sale) could result in any tax consequences in the hands of the owner. For the winner, it is considered whether any income tax consequences arise due to the difference between the amount paid for the lot and the value of the Property received in return as a prize. Transfer duty and donations tax are two other types of taxes which are explored thereafter.

Capital gains tax consequences

Capital gains tax consequences for the owner

For a capital gain or loss to possibly exist for the owner on the transfer of the Property by way of the lottery, paragraphs 2(a), 3 and 4 of the Eighth Schedule to t