The Divorce Act empowers the court to order maintenance payments and the dividing of assets if an agreement cannot be reached between the parties.The court has a wide judicial discretion to order a fair maintenance payment, either for a limited period of time or until the earlier of death or remarriage of the party concerned. This has given rise to much litigation, as what may be fair or just in the eyes of one party may not be so for the other party.
There have been a number of judgments, however, where the payment of capital sums and the transfer of assets were awarded to meet the maintenance needs of the one spouse.Such awards have tax consequences and can cause hardship to the burdened spouse.
Donations tax could arise unexpectedly in a divorce settlement where a disposition potentially goes beyond the maintenance requirements of the donee spouse. The donations tax provisions in the Income Tax Act provide that where there is a disposal which was not gratuitous but the consideration was inadequate, there is a deemed donation. Donations tax is payable on the value of the property disposed of by a donor after deducting the general exemption. The tax is levied at the rate of 20% of the value donated.
Prior to the promulgation of the Matrimonial Property Act 88 of 1984,on 1 November 1984, donations between spouses were not permitted. Section 22 of the Matrimonial Property Act now allows donations between spouses and states that no transaction effected before or after 2 November 1984 shall be void or voidable merely because it amounts to a donation between spouses.
Donations between spouses are exempt from donations tax in three prescribed circumstances:
•Donations made to or for the benefit of the donor’s spouse under a duly registered antenuptial or postnuptial contract;
•donations to a trust in which a spouse has a vested interest; and
•donations made to a donor’s spouse, provided that the parties are not separated under a judicial order or notarial deed of separation.
The Income Tax Act also provides that donations tax is not payable in respect of ‘so much of any bonafide contribution made by the donor toward the maintenance of any person as the Commissioner considers reasonable’.Hence, if the donation is bonafide in respect of ‘maintenance’ (which is not defined), and if the Commissioner is satisfied that the amount is reasonable, the disposition is exempt from donations tax, and the lack of consideration does not bring the transaction within the scope of a deemed donation.
Although the Commissioner has to exercise his discretion in a reasonable fashion, the legal practitioner should be wary of following the trend of using capital payments as an alternative method of re-allocating assets between divorcing spouses under the guise of maintenance.
The granting of limited interests such as usufructuary rights in part settlement of one spouse’s (usually the husband’s) maintenance obligations to the other spouse (usually the wife) and the children born of that marriage could not only give rise to a donations tax exposure but could also give rise to capital gains tax (CGT) liability for either or both former spouses.
A spouse (usually the husband) can agree in a divorce settlement or be ordered by the divorce court to purchase an immovable property, either in his own name or in a trust, over which he is obliged to register a usufruct in favour of the other spouse (usually the wife) in discharge of his maintenance obligations towards her and the minor children born of the marriage.The usufruct could be for life without any conditions; or subject to a condition that it terminates on her remarriage; or for a fixed term, for example, until the youngest child attains the age of majority.The termination of a usufruct due to a wife’s remarriage could very well have CGT implications for the former husband that were not contemplated by the parties at the time of concluding the divorce settlement.
For CGT liability to arise from the disposal of a limited interest the disposal must also give rise to ‘proceeds’.Proceeds can take the form of a loss or gain. In most events, the former spouse will receive no proceeds when her usufruct lapses, for example, due to the expiry of a fixed term, and no CGT liability will arise.However, that may not necessarily be the case where the property underlying the limited interest has increased substantially in value or where the usufructuary spouse’s right has terminated due to her remarriage or where the new usufructuary or the bare dominium holder is a connected person to the former spouse and the extinction of the usufruct is due, for example, to the remarriage of the former usufructuary spouse.
In summary, there is a need for the legal practitioner to be aware of the tax implications that are inherent in all facets of divorce settlements, including the maintenance portions thereof.
Source: By Mandy Simpson (TaxTALK)