FURTHER TAX LAW BREAKS FOR HOMES OWNED BY COMPANIES AND TRUSTS


The tax break which we anticipated in our newsflash of August this year became law on 31 October 2010. For those who did not read the earlier newsflash I repeat hereunder its contents. The bottom line is that individuals whose homes are trapped in companies ,close corporations or trusts will be very well advised to exploit the broadened opportunity now available to them. Failure to do so will have very expensive tax consequences later! Time is limited.

In my earlier newsflash I mentioned that until a few years ago and as a result of a “gap” left in the transfer duty laws at that time, many people chose to register their homes in the name of companies, close corporations or trusts or combinations thereof. The gap in the transfer duty laws has since been closed leaving many people with little to no reason for keeping the property in such corporate entities. In fact in many cases there is nothing but disadvantage especially in the field of capital gains tax. As you probably know corporate entities do not enjoy the same capital gains tax concessions offered to ordinary people and the tax consequences to a company, close corporation or trust which sells a property is significantly different to that which would apply to a human being selling the same property.

It has not been easy for such owners to undo the corporate entity ownership structure due to the significant cost thereof. These costs would include a number of taxes including transfer duty and capital gains tax.

As the Government knew that from the beginning of 2010 it would be charging an annual levy for the mere continued establishment of corporate entities and as it knew that this charge would create a burden for many taxpayers it decided during the course of last year to offer people who were trapped in corporate ownership structures the opportunity to undo the process without facing the tax implications.

Amendments were therefore made to the Income Tax Act during 2009 which allowed for properties owned by companies, close corporations and trusts to be transferred on a completely tax free basis [i.e. no income tax, no capital gains tax and no transfer duty] to certain limited categories of natural persons.

As the category of natural persons to whom the property can be transferred on a tax free basis in terms of the 2009 laws is very limited the Government revisited this topic this year and legislation was submitted to Parliament and approved which expands the category of persons who qualify to take transfer of property on the same tax free basis.

The new law stipulates as follows:

1. Companies and Close Corporations – Subject to the conditions set out below, a company or close corporation which owns residential property may without any tax consequences [including transfer duty and capital gains] transfer that property to any one or more natural persons. The conditions are as follows:
1.1 The person/s must have personally and ordinarily resided in that property and used it mainly for domestic purposes during the period 11 February 2009 to date of the disposal by the company / close corporation of the property to the person/s; and
1.2 The person/s must be connected persons as defined in the Income Tax Act in relation to the company / close corporation. Although the term “connected persons” has quite a lengthy definition in the Act it can, for purposes of this article be understood with regard to companies to include any person who either by himself or jointly with a relative owns at least 20% of the company’s shares. For close corporations it includes any member or a relative of such member, and
1.3 Steps must have been taken to wind up, liquidate or deregister the company / close corporation within 6 months of the disposal of the property.

2. Trusts - Subject to the conditions set out below, a trust which owns residential property may without any tax consequences [including transfer duty and capital gains] transfer that property to a natural person or persons. The conditions are as follows:
2.1 The person/s must have personally and ordinarily resided in that property and used it mainly for domestic purposes during the period 11 February 2009 to date of the disposal by the trust of the property to the person/s; and
2.2 The person/s must be connected persons as defined in the Income Tax Act in relation to the trusts. Although the term “connected persons” has quite a lengthy definition in the Act it can, for purposes of this article be understood with regard to trusts to include any person who is a beneficiary of the trust or a relative of a beneficiary of the trust, and
2.3 Steps must have been taken to dissolve the trust within 6 months of the disposal of the property.

3. More complicated corporate structures – Some taxpayers have their property owned by a company, close corporation and/or trust which in turn is “owned” by another such corporate entity. A prime example of such a structure is where the property is owned by a company, where the shares in the company are owned by a trust and where the people who live in the house are the beneficiaries of the trust. The new legislation is designed to apply to such structures also and with reference to the “prime example” mentioned above, would allow on a completely tax free basis for the transfer of the property from the company to the trust and then from the trust to one or more of the beneficiaries. The conditions set out in paragraphs 1 and 2 above of course still apply and the natural person to whom the property is eventually transferred must have been using the property throughout the relevant period as his/her primary residence and the corporate bodies will thereafter have to be wound up / dissolved.

All the above concessions apply best to companies/close corporations or trusts which only own the residential property which is going to be transferred and which do not own any other properties. If the remedies are applied to corporate entities which do own other properties as well, the taxpayer will face tax consequences in various forms arising from the disposal of those other properties in the process of winding up or dissolving the corporate entity.

Although it might not immediately be apparent the new law does significantly broaden the category of persons to whom the tax free transfer is available. In the previous version the person to whom companies/close corporations could transfer the property was limited to a person who owned all the shares/member’s interest or his spouse. Now it can be transferred to any one person or to a number of persons [subject of course to the remaining conditions set out above] if the person/s or relatives of such person/s between them own a minimum of 20% of the shares/member’s interest. From the perspective of trusts although the category of persons has probably now from one perspective been narrowed [the previous version was understood to include anyone associated with the trust at all] the very onerous burden of establishing that the person solely financed the trusts’ acquisition of the property which is a requirement of the previous version has been eliminated. This means that any beneficiary/ies of the trust can qualify for the tax free transfer as long as the remaining conditions are met.

The new law applies in respect of disposals made on or after the 1st October 2010 and on or before the 1st January 2013.

Although no tax obligations will be attracted to the property transfers contemplated by the above legislation it should be kept in mind that there will be conveyancing fees to be covered. If the property is bonded then the costs of canceling the bond and registering a new one must also be budgeted for. The matter of whether the current bondholder will be prepared to renew a loan to the individual who is destined to become the owner should also not be taken for granted. It now appears to be common cause that the banks are no longer as generous with their loans as they were in the past.

Should you be an owner of a property which is registered in the name of a company, close corporation or trust and wish to avail yourself of the unique opportunity that is now available then you are welcome to contact us for assistance. Please bear in mind that it will only be available for the limited period already mentioned so you should not delay for too long.

Milton Koumbatis
MILTONS MATSEMELA INC.
12 November 2010
miltonk(at)miltons.law.za