WHAT IS THE TAXATION LAW AMENDEMENT ACT AND THE WINDOW PERIOD?
The Taxation Laws Amendment Act creates legislation that allows for a window period permitting Companies (this includes Close Corporations) and Trusts to transfer immovable property to individuals with certain tax advantages mentioned below.
There have been two pieces of legislation dealing with the current window period.
The first was Taxation Law Amendment Act 17 of 2009 which legislation introduced Para 51 of the Eighth Schedule to the Income Tax Act. This legislation was promulgated on 30 September 2009 and covered the period ending 30 September 2010.
The second was the Taxation Laws Amendment Act 7 of 2010 which introduced Para 51A. Para 51 A extended the relief offered by Para 51 with various amendments. This legislation covers the period from 1 October 2010 and will be the focus of this article.
On 10 January 2012 further amendments to Para 51A were gazetted, the effect of which are to remove the “ordinarily resided” requirement. The tax relief has thus been extended to properties where the owner may not have “ordinarily resided” but where the property was still used mainly for domestic purposes. The tax relief is thus open to those persons who own holiday homes in entities and to foreign owners who do not ordinarily reside in South Africa.
THE PREVIOUS WINDOW PERIOD
When Capital Gains Tax (CGT) was introduced in 2001 SARS created a limited window period during which those persons who owned their primary residences in Companies and Close Corporations could transfer that primary residence from that Company or Close Corporation into their personal names without having to pay the usual transfer duty. This window period did not apply to trusts and ended in 2003.
WHEN DOES THE CURRENT WINDOW PERIOD BEGIN AND WHEN DOES IT END
Para 51 applied to transactions entered into from the commencement of the window period on 11 February 2009 until 1 October 2010. The transfer must be registered by 31 December 2011.
For transactions entered into in terms of Para 51A, from 1 October 2010, the residence must be “disposed” of not later than 31 December 2012. The transfer may be registered in the Deeds Registry after 31 December 2012.
There are various “time of disposal rules” that apply where specific advice is needed.
WHO QUALIFIES TO TAKE ADVANTAGE
Companies, close corporations and trusts qualify to take advantage of this legislation subject to certain conditions.
The basic requirements are as follows:
1. The disposal must take place on or before 31 December 2012;
2. The residence to which the interest relates must be used for mainly domestic purposes from 11 February 2011 by one or more natural persons;
3. The natural persons must be connected persons in relation to the Company or Trust;
4.Within a period of six months from the date of the disposal the Company or Trust must be wound up / deregistered / revoked as the case may be. (dealt with in details below)
The definition of connected person is complex and is beyond the scope of this article and specific advise is required.
DOMESTIC PURPOSES AND FURTHER REQUIREMENTS
As mentioned above the specific requirement that the natural person acquiring the property must have ordinarily resided in the property from 11 February 2009 has been removed in the January 2012 amendments. The property must still have been used for domestic purposes.
SIZE OF PROPERTY
In terms of Para 51 the property could not exceed two hectares in extent. This requirement has been removed from Para 51A.
WHAT ARE THE TAX ADVANTAGES OF OWNING A PRIMARY RESIDENCE IN YOUR OWN NAME AS OPPOSED TO A COMPANY OR TRUST
There are various advantages to owning your primary residence in your individual name as opposed to a Company or Trust, the main advantages of which are as follows:
- when you sell your primary residence, sales of up to R2 million are disregarded for CGT purposes;
- where the primary residence is sold for more that R2 million, the first R2 million of gain is exempt from CGT;
- the rate at which individuals pay CGT is 13.3 % whereas for Companies and Trusts a higher rate is paid;
- as an individual an annual CGT exclusion is allowed. This is currently R30 000.00 (from 1 March 2012)
WHAT ARE THE TAX ADVANTAGES OF THE CURRENT WINDOW PERIOD
In other words what tax advantage will the individual gain by transferring a qualifying property from a Company or Trust to their individual name ? There are various exceptions to these rule, they are however “in general” as follows:
CAPITAL GAINS TAX (CGT)
When the property is transferred from the Company or Trust to the individual in terms of the window period, there is no CGT payable by the Company or Trust in respect of that transfer.
When the individual sells that property in the future, the following will apply:
- CGT will be calculated on capital gains that have accrued from the date on which the Company or Trust purchased the property, alternatively 1 October 2001 (alternatively in terms of the valuation at this date), whichever is the later date.
- the rebate of R2 million will be applicable (for a primary residence);
- the CGT is calculated at the rate of an individual and not a Company or Trust
The company or trust and the natural person taking transfer are deemed to be one and the same person for the purpose of determining the amount of any allowance or deduction.
Had the property not been transferred from the Company or Trust to the individual in terms of the window period, the Company or Trust would have had to pay CGT on the full gain (no R2 million rebate would apply) and CGT would be payable at the Company or Trust rate.
DIVIDENDS TAX
Dividends tax is payable where a company declares a dividend to its shareholders (or members) and the rate of dividends tax (previously STC) is currently 15%. (as of 1 March 2012) If a company sells a property and after payment of all expenses, there is a profit, the way this profit is paid to the shareholders or members is by the declaration of a dividend. Dividends tax is the tax that is paid on the sum declared at the rate of 15%.
Subject to the legislation, where a property is transferred from a Company or Trust to an individual in terms of the window period, no dividends tax is payable.
Should the property be disposed of by way of a sale, any distribution of the profit will not qualify for the exemption from dividends tax. The property must be distributed as a dividend in specie.
TRANSFER DUTY
Transfer duty is the tax paid to SARS on the transfer of immovable property in terms of the Transfer Duty Act. Where transfers occur in terms of the window period, such transfers will be exempt from transfer duty.
In the absence of the window period being applicable, transfer duty rates are currently as follows: (from 1/3/2011)
| All Purchasers: (sliding scale) | R0-R600 000.00 | nil % |
| R600 001.00-R1 000 000.00 | 3% (max of R12 000.00) | |
| R1 000 001.00-R1 500 000.00 | 5% (max of R37 000.00) | |
| R1 500 001 upwards | 8% (Plus R37 000.00) |
By way of example, transfer duty on a property transferred to an individual and valued at R1.5 million is currently R37 000.00.
THE TERMINATION OF THE COMPANY OR TRUST REQUIREMENT
In terms of Para 51A the benefits outlined will not apply to any disposal made on or after 1 October 2010 to a person by a Company or Trust unless within six months commencing on the date of that disposal (not to be confused with registration of transfer):
-In the case of a Company, the Company has taken steps to liquidate, wind up or deregister that Company as contemplated in the Act.
-In the case of a trust:
(a) the founder, the trustees and the beneficiaries of that trust have agreed in writing to the revocation of the trust, or
(b) application has been made to a competent court for the revocation of the trust. (If the founder is deceased, application will have to be made to court).
The SARS practice note in regard to this issue indicates that the company or trust does not actually have to be terminated but rather steps must be taken to initiate the process.
THE CONVEYANCING PROCESS
After the company or trust’s tax consultant or accountant has assessed the merits of the matter, a conveyancing attorney will have to be appointed to attend to the conveyancing process. Note that although no transfer duty is payable, conveyancing legal fees are still paid to the Conveyancer attending to the transfer of the property.
It should further be borne in mind that where the property is subject to a mortgage bond, that mortgage bond will either have to be paid up and cancelled or transferred from the name of the company or trust to the individual, either by means of cancellation and re-registration or by means of substitution in the Deeds Registry. The conveyancing costs associated with these will be borne by the individual.
TAX ADVICE
The content of this information note is a simplification of the legislation and is intended to provide an overview. The legislation contains detailed provisions that cannot be adequately provided for in a note such as this.
In the event of the window period opportunity being taken advantage of, the precise tax implications and circumstances of each matter must be carefully reviewed and studied. Conveyancers are not able to advise on the detailed tax implication of each matter and as such it is imperative that the company, close corporation or trusts tax advisor be consulted prior to proceeding.
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