Johannesburg, Tuesday, 01 February 2011 – Gone are the days when taxpayers avoided paying transfer duties by buying primary residences in the name of their companies, CCs or trusts. This was before the introduction of capital gains tax (CGT) in 2001 and the transfer duty anti-avoidance rule in 2002. But that did not stop taxpayers from keeping such residences in companies or trusts. To address this, a two-year window was granted in 2002. Seven years later, a second window opened for concerned taxpayers to transfer such houses out of these entities and into their own names. However, not everyone heeded the call.
Now, a new window period has come into effect and will remain open until the end of December 2012 for disposals or transfers into own names that take place until then. Encouraging taxpayers to make use of this opportunity, the South African Institute of Chartered Accountants (SAICA) warns that failure to do so could trigger adverse tax consequences.
“If you don’t transfer your primary residence into your name before the cut-off date you’ll expose yourself or your beneficiaries of your estate,” says SAICA project director: tax Muneer Hassan. In his example, Hassan shows that missing this opportunity could set you back –or your beneficiaries for that matter – by R150,000 in CGT. That is alarming, not least when it’s avoidable. If the primary residence is kept in your own name the individual qualifies for R1,5million exclusion where proceeds exceed R2million.
“It is common practice to make use of a company to hold the residence on behalf of one or more shareholders. Relief under these conditions will apply to transfers that satisfy the two key requirements: use and liquidation.” Alluding to utilisation, Hassan says “the primary residence which is being disposed of should have been used mainly for domestic purposes by the shareholders of the company or their relatives during the ‘window period’.”
As for liquidation, the other key requirement for relief from adverse tax consequences, Hassan says a company that disposes of the affected residence in anticipation of – or in the course of – its liquidation, deregistration or winding up also qualifies. However, to be eligible, he adds “the company must have taken steps to liquidate, wind up or deregister within six months of the disposal of the residence.”
So, what does qualifying for tax and transfer duty relief mean for you as a taxpayer? “If the disposal qualifies for relief, no taxable gain or loss will apply to the company when disposing of the residence. The person receiving the residence will not have any CGT gain or loss on the company shares surrendered, even if a small portion of the value associated with those shares represents taxable non-residence asserts,” Hassan asserts.
Importantly, the disposal of the property will also be exempt from transfer duties which, using an average residence with a value of R2million, could easily exceed R100,000. From this perspective, the relief should easily find favour with those keen to move their primary residences out of trusts and companies and into their own names without having to fork out thousands of rand in transfer duties or taxes.
Failure to transfer during the open window would expose owners – when they eventually transfer residences to own names – to a combination of CGT, transfer duties, secondary tax on companies or the new dividends tax, should the disposal occur after the new dividends tax comes into effect. If this liability does not arise during the lifetime of a individual taxpayer it will be borne by his or her estate eventually. The unfortunate upshot of this is a reduced inheritance for beneficiaries.
Although the legislation currently requires that a natural person must have ordinarily resided in that residence, National Treasury has indicated that the intention is that the relief is intended to also apply to holiday homes and that the legislation will be amended during 2011 to apply retrospectively from 1 October 2010. Clearly, where a professional person uses part of their home for their trade, they may still qualify for the relief so long as the portion used for their conduct of their practice is not significant.
