Residential property transfer concession to expire
04 December 2012
Posted by: SAIT Technical
By Norma Passmore (Moneywebtax/PKF)
Executive summary (SAIT Technical)
Taxpayers have until 31 December 2012 to usethe rolloverconcession in paragraph 51A of the Eighth Schedule of the Income Tax to tranfer residential property held by a company or trust to a natural person free from CGT, dividends tax and transfer duty under certain circumstances.
With the deadline set for the end of December 2012, time is running out for businesses or trusts to make a tax-free disposal of a residence currently held in a company or trust.
In May this year the South African Revenue Service (Sars) outlined the updated concession guidelines and while those eligible to take advantage of this attractive concession may have spent the time since in considering their option, they should be aware that time is fast running out.
The question arises whether qualifying entities should take advantage of it? There are some striking pros and cons to such a decision.
In 2010 Sars introduced paragraph 51A of the Eighth Schedule to the Income Tax Act, which provides for a window period within which residences can be transferred out of companies and trusts free of certain tax implications.
That window period is what expires on 31 December 2012. Subject to certain specific requirements, a residence can be disposed to qualifying persons without it being subject to either of capital gains tax, transfer duty or dividends tax. A primary objective of this concession is to reduce the number of companies, close corporations and trusts holding property.
For paragraph 51A to apply to the disposal of an interest in a residence, the following requirements have to be met in full:
Where a company or trust disposes of an interest in a residence to a natural person, during the window period of 1 October 2010 to 31 December 2012, as contemplated in paragraph 51A, the relief on offer: a rollover of the residence to the person at the base cost of the residence (in most circumstances); the effect of the rollover relief is to have all capital gains tax implications postponed until the residence is subsequently disposed of by that natural person; an exemption from transfer duty; and an exemption from dividends tax.
It is important to note that provided all the requirements of paragraph 51A are met, it also extends the relief measures to multi-tier structures such as a trust holding 100% shareholding in a company, which in turn holds the residence. In this instance, SARS has accepted that the residence may be transferred directly to the natural person beneficiaries of the trust. The benefit of this additional concession is that only the company would need to be deregistered and not the trust.
However, it is not all rosy: though there may be relief from capital gains tax and transfer duty there may still be dividends tax or donations tax implications. The deciding factor rests on how the disposal of the residence is structured: whether it is disposed of at market value or below market value to the qualifying beneficiary.
Therefore, for those that have not already done so I recommend professional advice be sought before actually transferring residences within a multi-tier structure.
An interesting point is that Paragraph 51A has broadened the relief measures to include the transfer of a holiday home, though one of the main hurdles to be overcome would be that the holiday home was used mainly for domestic purposes by a qualifying natural person. "‘Mainly' has been defined as more than 50%. It can be argued that one could qualify if a holiday home is let out for two months of the year and used by a qualifying natural person for domestic purposes for three months. In this instance, the percentage deemed to ‘domestic purposes' would be 60%.
On a technical note, one must be aware that where a company does not distribute the residence as a dividend in specie but rather disposes of it in terms of an outright sale there may also be dividends tax consequences.
Before committing to making an application, it warrants consideration that many residences were initially acquired into companies and trusts for perfectly valid reasons, many of which would still hold true today. These include protection from creditors, avoidance of transfer duty, and for estate planning purposes. However, due to ongoing tax amendments over the years some of these reasons may no longer be valid while others are still very much applicable, for example protection from creditors.
One of the benefits of holding a residence directly is that if the residence constitutes a person's primary residence then the capital gain arising on its disposal is subject to an exclusion of up to R2 million of the capital gain. This exclusion is not available to companies and trusts. While no such exclusion exists for the disposal of a holiday home, the effective rate of capital gains tax in respect of a natural person is lower than that of a trust (where the capital gain is taxed in the trust) or a company.
A further consideration is that all assets held by a natural person at date of death would form part of that person's estate and be subject to estate dutyand capital gains tax, whereas if the assets are held within a trust no such liabilities are triggered at date of death.
Finally, where a company or trust holds other assets besides the residence, the disposal of these assets upon termination of the company or trust would give rise to tax consequences for which there is no tax relief.
If you have taken all these considerations into account and still deem it attractive to transfer the property into a natural person's name, then delay no more - the clock is ticking,