RSM South Africa

The effect of land expropriation without compensation on your business

Land expropriation without compensation is a controversial topic in South Africa.

Proponents of this topic mention the following benefits, amongst others: 

  • Re-industrialising South Africa's economy,
  • Emphasis on black ownership in terms of land ownership and the economy,
  • The removal of monopoly structures and
  • The development led and driven by state.

During his maiden State of the Nation Address (SONA), President Cyril Ramaphosa highlighted, amongst other issues, a proposed amendment of Section 25 (Property) of the Constitution of the Republic of South Africa to the effect that land can be expropriated by the State without compensation.

This proposed amendment has caused some concern with the public.

These issues have been discussed at length in the popular press, but what are the implications for business, specifically relating to tax and the ability to continue in business?

This article attempts to clarify those issues, with reference to Capital Gains Tax and the going concern status of affected landowners.

Capital Gains Tax (CGT) implications

CGT is applicable when an individual or company disposes of an asset that is capital in nature.  Therefore, when land is repossessed, with or without compensation, CGT applies as a disposal has occurred.

The result will be a capital loss, which can be utilised against capital gains during the year of assessment or in the future.

Going Concern

For many individuals and companies, the land may be used to secure finance facilities, for example by means of a mortgage bond.

As such, we have to consider the two role players, landowners and the lending bank.

The landowners

The expropriation of land without compensation may affect the ability of the landowner to stay in business, i.e. the “going concern status” of landowners.  If the land was a significant income-producing asset. (i.e. land), this may also affect the landowner’s ability to secure new loans or repay the existing loan from the bank.

The bank

Recent statistics have demonstrated that the majority of landowners in South Africa have secured their loans with the following financial institutions: Banks (56%), agricultural co-operatives (9%) and the Land Bank (30%).

If the land is re-possessed without compensation and the landowners are unable to generate any income, they cannot repay loans.

These loans will need to be impaired on the financial statements of financial institutions, i.e. an expected loss will need to be recognised by the lender.  Depending on the size and nature of the bank’s debtor’s book, this may therefore also affect the bank’s financial position and, ultimately, even going concern status.

The above will also affect investors’ confidence.

Conclusion

During the ANC conference held in December 2017, the following was mentioned: “[The] conference resolved that the ANC should, as a matter of policy, pursue expropriation of land without compensation. This should be pursued without destabilising the agricultural sector, without endangering food security in our country and without undermining economic growth and job creation".

It is important to strike a balance between the need to achieve land distribution and financial stability of existing landowners.

Currently the bill is undergoing public consultation prior to the implementation.

The above are factors, amongst others, that the legislator should take into consideration when implementing the above policy.

Patrick Kabamba

Trainee Accountant, Johannesburg

 

References:

https://www.news24.com/SouthAfrica/News/land-expropriation-without-compensation-what-you-need-to-know-20180228

https://www.news24.com/SouthAfrica/News/land-expropriation-without-compensation-what-you-need-to-know-20180228

https://www.iol.co.za/business-report/raging-bulls-a-discussion-on-radical-economic-transformation-12396257


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