Transfer duty : habitatio and bare dominium

A full bench of the Western Cape High Court delivered an interesting and instructive judgment on 7 February 2018 in the matter of CSARS v Janice Beverley Short and Johannes Hermanus Jacobs, Case No A 289/2017, on appeal from a decision of the tax court.  At issue was how to determine the transfer duty payable when the component parts, habitatio and bare dominium, in immovable property are transferred.  The court found that the duty must be calculated on the full value of the property and apportioned between the two parts.

The transaction in question was the transfer of a property from a close corporation to Short and Jacobs, to be respectively bare dominium owner and holder of the habitatio, for R4,2 million.  The purchasers completed and submitted to SARS the prescribed forms reflecting the transfer duty payable on their respective portions of the property.  Short based her calculation on R2,87 million, being the value of the bare dominium, and Jacobs on the remaining R1,33 million representing the value of the habitatio.  The deed of alienation made no reference to these two amounts, but referred solely to the full purchase price.  Given the court’s reasons for its decision in the matter, the result would have been the same even had the deed referred to them.

The seller’s transfer duty declaration referred to the “total consideration” of R4,2 million, but did reflect the details of the purchasers as Short for the bare dominium and Jacobs for the habitatio.

Because the transfer duty table is cumulative and the rate increases in bands, splitting the purchase price into two components and treating each separately resulted in a total transfer duty of R225 998, consisting of R174 527 and R51 471 respectively.  SARS contended that the duty should be calculated on the full purchase price, which resulted in duty of R281 000.  The purchasers appealed to the tax court, which found in their favour.

The tax court’s reasoning was based on the definition of “property” in the Transfer Duty Act, 1949, which includes “any real right in land”.  The parties were agreed that a right of habitatio was a limited real right in land and therefore qualified as “property”.  The Act imposed duty on any transaction, which meant an agreement where one party agrees to alienate property in favour of another.  The value on which duty was to be calculated was on the consideration payable.

The purchasers were life partners who had structured the agreement in this way because Jacobs, as a partner in a firm of attorneys, could possibly be faced with a crippling liability in consequence of any large claim that might be made against the firm.  They therefore wanted to shield the ownership of the property against any such eventuality.  A registered right of habitatio is not exigible by creditors.

The court observed that the fact that the purchasers were to acquire separately registrable rights was not determinative.  A multiplicity of individually registrable rights could be the subject of one transaction for transfer duty purposes, as found in CIR v Freddies Consolidated Mines Ltd 21 [1957] SATC 132 AD.  What had to be determined, in both the present matter and Freddies Consolidated, was whether the acquisition of the different rights was part of one unitary transaction.  In both cases there were two purchasers.  The court in the present matter found it necessary to examine the agreement, applying the by now familiar rules of interpretation, by construing the language used with appropriate regard for its apparent nature and purpose, “judged against the factual mix in which the contract was concluded” and a “sensible regard to the business or practical result the parties apparently sought to achieve”.

The court identified an overwhelming number of “salient pointers” in the deed of agreement to there having been only one indivisible transaction and listed the especially significant ones.

1. The agreement referred to the purchasers as acting “jointly” as parties, whereas they contended to have acted severally.  The word “jointly” denoted an intention to acquire the rights together in one transaction.
2. The purchasers accepted joint and several liability for all obligations under the agreement.  This was irreconcilable with an intention to enter into to divisible transactions.
3. Only a single purchase price was given, with no indication that the parties had agreed separate prices for the habitatio and the bare dominium.  This was in contrast to a remark of Stratford J in Modder East Orchards Ltd v Receiver of Revenue [1924] 1 SATC 40 TPD: “The appropriation of separate considerations is a crucial point in deciding upon the divisibility of a contract”.
4. If the contract was intended to give rise to two discrete transactions, its form failed to comply with the provisions of the Alienation of Land Act, 1981, a requirement of which is that in the case of two discrete transactions the price for each would have to be expressed in the deed of alienation.
5. Transfer was to be given only against payment of the full R4,2 million, with no indication that either purchaser could obtain part performance against payment of a lesser price.
6. Commission was calculated on the full R4,2 million purchase price, and the parties agreed that the estate agent was the effective cause of “this sale”, wording that sensibly related to only one transaction.
7. It was evident that the scheme of the purchasers, to protect the property against creditors, could not be realised if the contract were not implemented as a unitary transaction.
8. The content of the concept of bare dominium is informed by the value of the habitatio, which depends on the life expectancy of the holder.  It would be “singularly unbusinesslike” for Short to purchase bare title of a property subject to a right of habitatio to be reserved in favour of some as yet undetermined third party to be identified in a separate contract yet to be concluded by the seller, should Jacobs not fulfil his contract.
9. Finally, and perhaps most significantly, the nature of the bare dominium to be acquired by Short was defined by Jacobs’ right of habitatio.  What fell to be acquired by Short was amorphous if it was not integrally related to what fell to be acquired by Jacobs.  This highlighted the integral character of the transaction; the first part, the acquisition of the bare dominium by Short, had no meaning if divorced from the second.

Instinctively one recoils from the proposition that by slicing and dicing an immovable property into its component rights purchasers could calculate the transfer duty independently on each component.  Instinct aside, though, the judicial precedent, especially the Freddies Consolidated Mines and to a lesser extent the Modder East Orchards decisions militated against the contentions of the purchasers.  A noteworthy aspect of the court’s decision making was its emphasis on the need to view the deed of alienation from a businesslike perspective.  Did it make commercial and practical sense?  The need for careful and thoughtful drafting, always asking whether a provision makes practical sense, is essential.

Finally, whilst the court, with respect, correctly dealt with the deed of alienation in disposing of the matter, what if it had found that the contract survived scrutiny?  Could SARS have attacked it under section 20B of the Transfer Duty Act as a transaction, operation, scheme or understanding which had the effect of granting a tax benefit, created rights or obligations not normally created between persons acting at arm’s length, and the sole or main purpose of which was to obtain a tax benefit?  We will never know, but it is interesting to speculate.