Stokvels are mostly informal savings clubs where members agree to pool money together in order to reach a common objective. The objectives vary in nature, from assisting each with funeral costs, personal living expenses, purchase of large items, etc.
A property stokvel is no different, the only difference is that the amounts that are involved are larger and the duration of the stokvel will be long term in nature. There are also a lot of technicalities and other legal requirements involved, which are not present in other stokvels.
The objectives of Property Stokvels differ and one should understand clearly the vision and objective of each stokvel to avoid confusion later. For some stokvels, it is about buying each other homes or building materials, for some it is for investment purposes (generating income for the members).
For the purposes of this article, we will focus on investment property stokvels; investing in physical property not buying property listed shares. Usually the stokvel is used as a means of raising one big amount and once it is achieved, the stokvel will then be able to purchase the property(ies).
Because a Stokvel is an informal entity, it cannot enter into a legal agreement to purchase a property. A legal structure or entity will be required in order to provide protection of all members, cater for their needs, be equitable to all members but also protect the assets of the group from personal circumstances of individual members. As responsible citizens, the entity will need to pay tax, and so the most tax efficient structure will be required so that members do not pay unnecessarily high taxes.
South African law identifies legal entities as either individuals (also referred to as natural person), companies or trusts (also referred to as juristic person). These entities can enter into contracts and pay tax in their own names. Stokvels would need to consider one of these as the vehicles to house their investments.
In order to determine which entity would be suitable, the Stokvel would need to consider some critical factors. These include:
- how the members will benefit,
- the taxes that have to be paid by the entity as well as the members for income received,
- the impact of personal circumstances of the members on the assets of the group such as a member either dying, getting divorced, being in debt or voluntarily exiting the investment and
- the associated set up and ongoing costs to maintain that structure.
Looking at each of the above mentioned structures
- Individuals names
Although banks do allow several people to apply for a bond on their names and this is probably the easiest and cheapest way to get started. The bond and property would need to be registered in all the member’s names. This could cause significant problems as personal circumstances of the member can have adverse effects on the group for example if a member wants to exit, a new bond would need to be registered with the remaining members thus incurring additional taxes such as transfer duties and capital gains tax. The bond would also need to come off from one member’s bank account, therefore unfairly prejudicing that member and the additional income from the rental income could push the members into an even higher tax bracket therefore resulting in members pocketing even smaller profits from the property. There are no set up costs in this structure, but the admin and reconciliation of multiple bond applicants will also be a potential headache.
The Stokvel can be set up as a company where the members become shareholders and they can nominate competent members to become directors who will see to the day-to-day running of the business. The bond and property would be registered in the company name. The entry and exit of members would be managed through the buying and selling of shares into the company. The normal company tax will apply at 28% and dividends will be declared from the profit of the business, where an additional dividend withholding tax of 20% becomes payable. The impact of the personal circumstances of the members can be minimised by having a shareholder’s agreement or buy and sell agreement that states what must happen when a member wants to divest for example current shareholders can have first right of refusal to the shares of a member. The set-up costs for a company are not that high and the ongoing costs are reasonable.
The Stokvel can set up a trust where the members become beneficiaries and they can nominate competent members to become trustees who will oversee the day-to-day running of the business. The bond and property would be registered in the trust’s name. The beneficiaries would be noted on a trust deed, which is a document that is drafted by specialist attorneys and is submitted to the high court. When members need to be changed, an amendment would need to be done on the trust deed. The tax on a trust is currently at 45%, but beneficiaries can be taxed at their marginal tax rates when the profit is declared, this can be beneficial when members nominate their children as beneficiaries as they can be taxed at the children’s tax rates. Set up costs and ongoing costs for trusts are significantly higher than for companies.
About the author:
Silindile Leseyane is the founder and chairperson of Sakhisizwe Property Stokvel, one of the Stokvels on the StokFella platform. In using StokFella, in less than 7 months; Sakhisizwe Property Stokvel has been able to raise R2mil and invest in 4 residential multi-let properties. You can reach Silindile Leseyane via email on firstname.lastname@example.org.
Important to Note:
This article should not be considered as financial advise. It is for informational purposes only and should not be solely relied on for making decisions. The right professionals need to be consulted for your stokvel’s unique situation. Stokvels should budget for consulting professionals so that they aware of the implications of their decisions.