The new Transfer Duty Amendment Act of 2019 (Amendment Act), which was enacted on August 28, 2019 ushered in a completely new way of administering transfer duty.
Transfer duty is a tax payable by the acquirer of immovable property.
The most notable improvements included exempting first-time residential property and undeveloped plot-owners from the duty. The said Amendment Act also increased the citizen exemption from P200,000 to P1m, which enhances property ownership by citizens.
For the record, the Amendment Act had, at the date of publication of this article, not yet commenced. In other words, it is law in waiting and all that is needed for it to take effect is for the Minister of Finance and Development Planning to issue a commencement date. In practice, commencement notices relating to tax laws are issued shortly after the enactment of the laws.
Whilst the mentioned exemption brought about considerable relief to, mostly citizens, there is one thing that needs consideration in order to harmonise the rejuvenated Act with the other major tax Acts, being the Income Tax Act, VAT Act and the Capital Transfer Tax Act.
The last mentioned three Acts all provide an exemption from tax in cases where two or more resident companies engage in some form or reconstruction, re-organisation, amalgamation or merger, processes which facilitate business evolution and wealth creation.
The exemptions therefore propel business restructuring with zero to minimal incidental tax costs. In such reconstructions, the ultimate beneficial shareholding may not change and that justifies the tax exemptions.
The fact that the Transfer Duty Act is the only piece of tax legislation which does not have exemptions related to reconstructions makes it the odd one out, hence the need to harmonise it with the other Acts.
Reconstructions may involve, amongst others, merging two or more companies into one, amalgamating two or more companies as well as moving the business and assets of one company into another.
Reconstructions usually result in business efficiencies through leaner and smarter structures, which catapults enterprises to be more profitable in the long run.
Practically, such exercises usually reduce future operational costs by
As stated above, the three major tax Acts have provisions, which minimise or eliminate tax when company reconstructions occur. For example, the Income Tax Act exempts the transfers of immovable property or shares from Capital Gains Tax in cases where two or more resident companies embark on a reorganisation.
In order for the exemption to be granted, no shareholder should benefit at the expense of another and the exercise must be carried on by two or more resident companies.
That exemption allows business restructuring without the companies involved suffering tax. The Capital Transfer Tax Act, which levies tax on donations and inheritances, also accords a Capital Transfer Tax exemption on companies that engage in reconstructions where such companies are resident, provided no shareholder benefits at the expense of the other from such exercise.
Lastly, the VAT Act allows for business transfers from one or more companies to another with no tax implications, otherwise known as zero-rating of a going concern.
The tax relief that is brought by these exemptions is so essential in the promotion of business growth through reconstructions.
Having demonstrated above that the major Tax Acts accord relief in reconstructions, an amendment to the Transfer Duty Act exempting companies involved in reconstructions from tax will harmonise the Act with the other major Acts.
Secondly, it will facilitate tax-free business restructures, paving way for businesses to increase their profitability. Improved business profitability yields enhanced future tax collections, due to increased business profitability.
There is no doubt that the business community would find such an exemption beneficial and certainly essential. Whilst it is acknowledged that the Organisation for Economic Development and Cooperation (OECD) is against too many tax exemptions, reconstructions pave way for tax authorities to collect more taxes in the future, due to increased business profitability.
*Jonathan Hore is a Managing Consultant (Tax) at Auprecon Tax Specialists in Gaborone