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This article was first published in the second-quarter 2012 edition of Personal Finance magazine, which is on sale in bookshops and retails nationwide until July 20, 2012.
Taxpayers were granted an opportunity to transfer their residences out of their companies or trusts and into their own names free of capital gains tax (CGT), secondary tax on companies (STC) and transfer duties, and there have now been some minor changes to the rules that govern this tax relief.
Broadly speaking, the tax relief provisions provide that if the residence is held in a company or trust, that entity has until December 31, 2012 to dispose of the residence, and – provided certain criteria are met – no CGT and STC will be payable by the entity and no transfer duties will be payable by the purchaser in respect of the disposal.
What has changed now that the Tax Laws Amendment Act of 2011 has been gazetted?
* Previously, the tax relief applied only if one or more natural persons ordinarily resided in the residence during the period February 11, 2011 until the date of disposal. As a result, the disposal of certain types of residences, such as holiday homes, did not qualify for the tax relief, because individuals generally do not ordinarily reside in their holiday homes.
The effect of the change is that the disposal of various types of residences (including holiday homes or secondary homes) may now qualify for the tax relief provided the other requirements are met. It should, however, be noted that the taxpayer must still prove that these residences are used mainly for domestic (that is, non-business) purposes.
* The tax relief also applied only if – within six months of the date of disposal of the residence – the company or trust had taken certain steps to terminate its existence. In the case of a trust, the rules previously stipulated the exact nature of the steps that should have been taken. The rules have now been changed to state merely that steps must have been taken to terminate the trust.
It is important that taxpayers ensure that the disposal of a residence is structured in the correct manner so that it may qualify for the relief. Therefore, it is advisable that any potential transaction is reviewed by a tax specialist before it is implemented.
Previously, it was not entirely clear whether, in order to qualify for the relief, the person acquiring the residence from the company or trust had to be a “connected person” in relation to the company (for example, it could not be an unrelated third party).
The explanatory memorandum to the Tax Laws Amendment Act of 2011 indicates that the law has been clarified to state that the transferees must be “connected persons” in relation to the liquidating entity (company or trust). However, it is not apparent from the amended rules that this clarification has been achieved.
The question arises as to whether there is a benefit to moving your second home from the company structure – and incurring the costs of doing so.
The long-term benefit of making use of the tax relief and transferring your holiday home into your own name is that many taxpayers, when they retire, sell their primary residence (and obtain the relevant CGT relief at that time) and then move into and live in their holiday home or secondary residence. This latter residence then becomes their primary residence and, as result, the taxpayers may qualify for CGT relief again when they dispose of that residence. This relief would not be available if the holiday home or secondary residence was still held in a corporate entity at that time.
It should also be noted that the CGT inclusion rate (namely, the percentage of a taxpayer’s net capital gain that constitutes a taxable capital gain and is included in his or her taxable income) is expected to increase with retrospective effect from March 1, 2012. For companies and trusts (other than special trusts), the CGT inclusion rate will increase from 50 percent to 66.6 percent, and for individuals and special trusts, it will increase from 25 percent to 33.3 percent.
* Anthea Scholtz is the tax director at Deloitte in the Western Cape. For an earlier article on the subject, see “How to meet the new property transfer criteria” in the first-quarter 2011 issue of Personal Finance magazine.