Understand the tax implications before you tie the knot

Couples need to delve deeper into the tax implications of getting married, particularly in community of property. Photo: Pexels.com

Couples need to delve deeper into the tax implications of getting married, particularly in community of property. Photo: Pexels.com

Published Sep 1, 2023

Share

By Yolisa Dyasi

For most people, getting married is one of the most significant events in their lifetime. A day filled with love and promises of nothing but happiness for all the days to come. And whilst most couples think about the venue, the dress and the cake, the tax implications of getting married are usually the last thing on their minds.

This article delves deeper into the tax implications of getting married, particularly in community of property.

South African law recognises three types of marriages which may be registered with the Department of Home Affairs.

Civil Marriage

It is classified as a legal union between a man and a woman. Currently, civil marriages in South Africa can only be entered into by heterosexual couples. Civil marriage may be classified and registered under three specific regimes:

  • Marriage in Community of Property;
  • Marriage Out of Community of property with the Accrual System; and
  • Marriage Out of Community of Property without the Accrual System.

Civil Union

Couples married under the Civil Union Act, enjoy the same rights, responsibilities and legal consequences as couples married in a civil marriage. However, the Act does recognise and allow the union of same-sex couples.

Customary Marriage

Customary marriages are also known as traditional marriages, regulated by African traditions and customs. Unless an antenuptial contract was concluded prior to the customary marriage, these marriages are classified as a marriage in community of property and would bear the full legal, financial and tax implications of such a marriage.

The Income Tax Act defines a spouse as

“A person who is the partner of such person—

  1. in a marriage or customary union recognised in terms of the laws of the Republic;
  2. in a union recognised as a marriage in accordance with the tenets of any religion; or
  3. in a same-sex or heterosexual union which is intended to be permanent,

and “married”, “husband” or “wife” shall be construed accordingly: Provided that a marriage or union contemplated in paragraph (b) or (c) shall, in the absence of proof to the contrary, be deemed to be a marriage or union out of community of property.”

By definition, unless a spouse has documentary evidence to prove otherwise, their union is classified as “out of community of property” by default. Should a taxpayer want to benefit from the personal income tax benefits discussed below, they may need to provide the documentation to prove to SA Revenue Service (Sars) that they are indeed married “in community of property”.

Taxpayers who are married in community of property are typically taxed on an equal split of all the passive income received by both spouses. This passive income includes, amongst others:

  • Local and foreign interest;
  • Local and foreign dividends are subject to SA normal tax;
  • Distributions from a Real Estate Investment Trusts (REIT);
  • Capital Gain/Loss; and
  • Local rental income.

Practically speaking, this would mean that all the income listed above would be included, in full, on both spouses’ income tax returns and be taxed equally for each spouse upon assessment on an annual basis. For example:

This 50/50 split comes with some advantages, including the ‘double’ benefit of the exemptions or exclusions in terms of the Income Tax Act. For example, because both spouses are eligible for the R23 800 exemption (R34 500 if over the age of 65) of local interest, this would result in spouse A’s exemption indirectly being used to lower the taxable income for spouse B.

That stated, spouses married in or out community of property with the accrual system may still opt to exclude certain income from their communal estate. This would have a ‘what’s yours is yours, and what’s mine is mine’ effect; each spouse would only need to declare the income they received in their personal capacity during the year of assessment.

Similar to the interest exemption, both spouses qualify for the R40 000 annual exclusion for Capital Gains Tax (CGT) purposes. From the example above, where spouse A would have previously included R15 000 (R55 000 – R40 000 )in their taxable income, no capital gains are included in their taxable income because the net capital gain is less than R40 000.

Additionally, when a spouse ‘disposes’ of an asset to another spouse, the transaction is exempt from CGT. Where there is a transfer of assets between spouses, the spouse disposing of the asset disregards any capital gain or capital loss and the spouse acquiring it takes over the history of the asset for purposes of determining that spouse’s base cost.

The Income Tax Act explicitly excludes donations between spouses from donations tax. This means that spouses can donate a limitless number of assets to each other without paying the 20% tax on the value of those assets.

Sometimes ‘til death do us part’ lasts just a little longer than that with the consideration of Estate Duty in the event of a spouse passing away and the surviving spouse inheriting all the assets, no estate duty is payable whatsoever. Additionally, no CGT is applicable. However, the estate duty and CGT may be due and payable upon the death of the surviving spouse.

In essence, although tax is the last thing on a couple's mind before tying the knot, it is important to have a discussion about this as the marriage will have an implication on both spouses’ finances and taxes on a year-to-year basis until death do you part.

* Dyasi is a Tax Technical Consultant at the South African Institute of Taxation (Sait)

PERSONAL FINANCE