End-of-year deadline for tax-free property transfers looms
20 November 2012
Posted by: SAIT Technical
By Irma Swanepoel (Moneywebtax)
Executive summary (SAIT Technical)
Owning a property through a company or trust has several tax consequences such as a higher effective CGT rate upon disposal, no annual exclusion or primary residence exclusion and in certain instances, dividends tax implications. In this article, Irma Swanepoel reflects on the roll-over relief provided by paragraph 51A until 31 December 2012.
When buying a home many people opt to hold the home in the name of a corporate entity rather than in their own name. One of the main reasons for this decision is that they want to save on taxes. However, since the introduction of Secondary Tax on Companies in 1993, the introduction of capital gains tax (CGT) in 2001 and the introduction of transfer duty on the sale of shares in a residential property company ortrust in 2002, taxes on acquiring and disposing of a property in an entity have increased substantially.
The most prominent tax consequences of owning a property in your own name can be summarised as:
1. When purchasing the property you will be responsible for the payment of transfer duty which is currently calculated on a sliding scale ranging from 3% to 8% with the first R600000 of the purchase price being exempt, unless bought from a developer in which case VAT and not transfer duty is paid.
2. When disposing of the property you will be liable for CGT, at a maximum effective rate of 13,3%.
Two very important CGT benefits of owning the property in your own name are that natural persons qualify for the Annual Capital Gains Exclusion, currently R30000, and that you may also qualify for the Primary Residence Exclusion in terms of which the first R2000000 of the capital gain made on the disposal of your primary residence is not included in your CGT calculation.
3. On death the property will be an asset in your estate and will be subject to estate duty at the rate of 20%, with the first R3500000 of the net value of the estate being exempt.
The most prominent tax consequences of owning property through an entity are:
1. When purchasing the property the entity will be responsible for the payment of transfer duty at the same rate as individuals as explained above.
2. On disposal of the property the entity will be liable for CGT. The current effective CGT rate for companies and close corporations is 18,6% and for trusts 26.7%.
Entities do not have the benefit of the Annual and Primary Residence Exclusions.
3. On distribution of the proceeds of the sale of the property from a company or close corporation to the entity's shareholders or members, the shareholders or members are liable for dividends tax at a rate of 15%.
4. On the natural person's death, there is no estate duty liability on the estate of the natural person as the property does not form an asset in the estate.
Compared with entities, individuals have the benefit of a lower effective CGT rate, the Annual and Primary Residence CGTexclusions and, of course, no dividend tax liability. Over and above the more burdensome tax consequences of owning a home through an entity, the administration costs of managing and maintaining the entity may also becomevery expensive.
Owning the property in an entity has the tax benefit of no estate duty liability on the natural person's demise. Other benefits, unrelated to tax, such as the protection of the property against creditors and estate planning benefits such as preserving the property for future generations may also play a role when deciding on the holding entity of the property. From a tax perspective however, the benefits of holding the property in a natural person's own name seem to outweigh the benefits of holding the property in the name of an entity.
Because of the changes to tax laws, Sars created an amnesty period of one year in 2002 wherein residences which were owned by entities could be transferred to natural persons without incurring all the usual tax liabilities. Unfortunately few taxpayers availed themselves of this opportunity.
In the 2009 Budget Speech a new amnesty period was announced starting on 1 January 2010 which allows property to be transferred free of transfer duty and dividends tax and allowing the CGT to be rolled over to the natural person transferee. After a number of amendments to the amnesty legislation, the final date for disposal of the property by the entity in order to qualify for the tax benefits is 31 December 2012.
The property to be disposed of would have to be transferred to one or more natural persons who are connected persons to theentity and the property must have been used for domestic purposes by the connected person or persons from 11 February 2009. After transfer of the property, legislation requires that steps must be taken within six months to terminate the entity.
It is strongly recommended that if you might qualify for the tax benefits under the amnesty period, you discuss with an expert the benefits of owning the property in your own name as opposed to keeping the property registered in the name of an entity. The opportunity for saving on taxes in these circumstances may not be offered by Sars again.
Dividends tax replaced Secondary Tax on Companies on 1 April 2012.