Taxpayers will have until 30 September 2010 to transfer a primary residence from a company or trust under current rules without having to liquidate, wind up or deregister the company or trust in terms of proposed new income tax rules.
Paragraph 51 of the Eighth Schedule to the Income Tax Act 58 of 1962 was promulgated on 30 September 2009 and is deemed to have come into operation on 11 February 2009.
Paragraph 51 allows for a domestic residential property to be transferred to the natural person (which includes his or her spouse), without incurring tax liabilities such as secondary tax on companies (STC), capital gains tax (CGT) and transfer duty. It applies to transfers made from 11 February 2009 to 31 December 2011.
Currently, paragraph 51 applies where the natural person, alone or with their spouse:
- directly holds all the share capital or members' interest in the company from 11 February 2009 to date of registration in the deeds office in the name of that natural person or their spouse, or their names jointly; or
- disposed of the residence to a trust by way of donation, settlement or other disposition, or financed all the expenditure actually incurred by the trust to acquire and improve the residence; and
- the natural person (including their spouse), should personally and ordinarily reside in the residence and must use it mainly for domestic purposes as their ordinary residence from 11 February 2009 to date of registration, which registration must take place by 31 December 2011.
Proposed revisions to the Income Tax Act
A more flexible window period was proposed in the 2010 Budget Speech to allow residential property entities to be liquidated or dissolved with limited compliance and enforcement.
The Draft Taxation Laws Amendment Bill of 10 May 2010 proposes revising the existing paragraph 51 and introducing paragraph 51A, which deals with the liquidation, winding up or deregistration of the property entity within 18 months, or a limited further period as will be allowed by the South African Revenue Service (SARS). The effect of the proposal means that taxpayers will have until 30 September 2010 to transfer a primary residence from a company or trust under the current paragraph 51 rules, without having to liquidate, wind up or deregister the company or trust.
From 1 October 2010, the revised paragraph 51 and new paragraph 51A will come into effect and the extended period for transfers until 31 December 2012 will be granted.
Implications of the proposed amendments
The proposed amendments have the same core objective as the current legislation, which is to assist taxpayers with simple, standardised structures where the residence was placed in a company or trust.
However, the proposed additional requirement that the company or trust must be liquidated, wound up or deregistered within 18 months, or a limited further period as allowed by SARS, is to ensure that the relief supports Government's objective of removing unnecessary entities from the company register. This will simplify administration and enforcement.
According to the Explanatory Memorandum, these requirements limit the relief to simple structures and ensure that the disposal cannot be used as a tax saving tool, for example, where the property is transferred to relatives tax-free.
In line with the current legislation, the relief will not be available where the shares in a property company are held by a trust, of which the natural person residing in the property is a beneficiary.
The general requirements for paragraph 51A are that the residence must:
- Represent at least 90 percent of the value of the company or trust throughout the period in which the natural person to whom the residence is disposed of, held shares in the company or the trust owned the property.
- Be used mainly for residential domestic purposes by the shareholder in the case of a company, or the donor/financier in the case of a trust, alone or together with a spouse and/or relatives throughout the same period.
- Finally, the relief will apply only in relation to the portion of the residence that does not exceed two hectares.
Effect on properties held through companies
- The residence must be owned by a single shareholder, alone or together with a spouse, and be disposed of to the same shareholder, alone or together with a spouse.
- Although roll-over relief will apply in the same manner as envisaged in the current paragraph 51, all other assets disposed of by the company will be taxable, such as a golf membership in the common area.
The revised legislation proposes a distinction between the disposal of shares by the original shareholders of the company (the shareholders when the property was acquired), and new shareholders, who acquired shares in the company after the property was acquired but before 11 February 2009.
- Where the residence is disposed of to the shareholders holding company shares when the company acquired the residence, the base cost of the residence is the same as that held by the company. This base cost will equal the company's purchase price plus possible adjustments, improvements and some depreciation for partial business use.
- If the residence is disposed of to persons other than the original shareholders of the company, the base cost in the residence is to be kept largely in line with current shareholder's cost of acquiring the shares. This cost again must be adjusted for subsequent improvements to the property (less applicable depreciation associated with the residence).
Effect on properties held through trusts
- The trust must dispose of the residence in anticipation of, or in the course of the trust's revocation.
- This trust must be wound up within 18 months or a limited further period allowed by SARS.
- The donor alone, or together with a spouse, must have disposed of that residence to the trust by way of a donation, settlement or other disposition, or have financed all the expenditure that was actually incurred by the trust to acquire and to improve the residence.
- On disposal, the residence must be transferred to the same donor (and/or spouse).
No taxable gain or loss will apply to the trust when disposing of the residence.
- All other assets disposed of by a discretionary trust are taxable, including residence-related assets, such as a golf membership in the common area.
- On disposal of the residence, the base cost of the residence will be equal to the discretionary trust's purchase price plus possible adjustments (improvements and some depreciation for partial business use).
- There is no rule for subsequent owners as it is not possible under common law to sell the interest in a discretionary trust.
For further information and legal advice on Tax Relief for transfer of a residential property, please contact:
Mariëtte Cruywagen, Senior Associate, Tax
Rekha Jaga, Director, Real Estate