Binding Private Ruling 133 (Tax Alert)
28 January 2013
Posted by: SAIT Technical
By Andrew Seaber and Nicole Paulsen (DLA Cliffe Dekker Hofmeyr Tax Alert)
Tax Alert reflects on the recently issued BPR 133. This BPR deals with the paragraph 51A relief provisions in the Eighth Schedule to the Income tax Act. Paragraph 51A provided relief from CGT, transfer duty and dividends tax for disposals of a residence to a qualifying natural person from a company or trust. The disposal had to take place before 31 December 2012.
In a recent Binding Private Ruling (BPR 133), SARS was asked to rule on the capital gains tax, transfer duty and dividends tax consequences arising from the proposed transfer of a residence to a qualifying natural person pursuant to the provisions of paragraph 51A of the Eighth Schedule to the Income Tax Act, No 58 of 1962 (Act).
The applicant, a company resident in South Africa, proposed to distribute as a dividend in specie its only asset, a residential property to it sole shareholder, a company resident in a foreign country (Company 1). In turn, it was proposed that Company 1 distributes the residence to the sole shareholder of Company 1, a natural person who is a resident of South Africa for tax purposes but who lives abroad (Individual).
Material to the application was the fact that from 11 February 2009 to 31 May 2012, the Individual rented out the residence for an aggregate number of days representing 40% of such period of time. It appears that during the other 60% of the time period the Individual had the right to use and occupy the residence but did not actually do so.
In this regard, it is noted that the capital gains tax relief provided for in paragraph 51A of the Eighth Schedule to the Act does not apply inter alia unless on or before 31 December 2012, the residence is ultimately acquired by one or more natural persons who mainly used the residence for domestic purposes during the period commencing on 11 February 2009 and ending on the date of disposal. The term 'mainly' has been interpreted by the courts to mean a quantitative criterion of more than 50% (SBI v Lourens Erasmus (Edms) Bpk 28 SATC 233). Given that the residence was only rented out for 40% of the relevant period, it was contended by the Applicant that the residence had been used mainly for domestic purposes during such period, despite the fact that the Individual did not actually use or occupy the residence during the remaining 60% of the period. SARS agreed.
SARS ruled that the proposed transaction qualified for the amnesty relief. In this regard, SARS confirmed that the Applicant and Company 1 must be treated as having disposed of the residence for an amount equal to the base cost thereof, resulting in no capital gains tax being triggered in respect of either the distribution to Company 1 or the subsequent distribution to the Individual. Further, SARSruled that having complied with the provisions of paragraph 51A of the Eighth Schedule to the Act, the Applicant, Company 1 and the Individual will be treated as one and the same person with regard to:
the date of acquisition of the residence by the Applicant;
the amount and date of incurral by the Applicant of any expenditure in respect of the residence allowable under paragraph 29(4) of the Eighth Schedule to the Act; and
any valuation of the property effected by the applicant under paragraph 29(4) of the Eighth Schedule to the Act to determine the market value of the residence on the valuation date (ie 1 October 2001).
SARS ruled further that no dividends tax will be payable either in respect of the distribution of the residence by the Applicant to Company 1 or in respect of the distribution of the residence by Company 1 to the Individual. As regards the initial distribution to Company 1, the exemption contained in s64FA(1)(c) applies as the distribution constitutes a disposal as contemplated in paragraph 51A of the Eighth Schedule to the Act. In respect of the distribution of the residence by Company 1 to the Individual, no dividends tax is payable as Company 1 is a foreign company the shares in which are not listed on the Johannesburg Stock Exchange and furthermore the dividend paid in respect of such shares consists of the distribution of an asset in specie (the residence).
By virtue of s9(20) of the Transfer Duty Act, No 40 of 1949 SARS also ruled that no transfer duty is payable on either of the distributions.
It is important to appreciate that the opportunity to take advantage of the amnesty relief provided for in paragraph 51A of the Eighth Schedule to the Act is no longer available as it is specifically required that the disposal/distribution must have taken place by 31 December 2012 (see paragraph 51A(6)(b)).
For those who timeously entered into the relevant agreement and/or passed the relevant resolutions to record and authorise the disposal of the residence held by a company, close corporation or trust, there is another important requirement which should be borne in mind. To qualify for the amnesty relief, steps must be taken to either deregister or liquidate the company or close corporation, or in the case of a trust, to terminate the trust, within six months of the date of disposal (see paragraph 51A(6)(a)). For this reason, it is imperative that a conveyancing attorney be appointed as soon as possible after the date of disposal to transfer the residence in the appropriate deeds office but in any event within a period of six months of the date of disposal, to allow for the deregistration/liquidation/termination steps to be taken timeously.