Sars widens relief for disposal of residences
06 June 2012
Posted by: SAIT Technical
On May 29 Sars reissued its guide to the disposal of a residence from a company or trust. An important concession in the revised guide is that in a multi-tier structure, the residence does not have to pass up the chain with all entities in the chain having to terminate.
The residence can be disposed of directly by the entity holding the residence to the natural persons at the top of the structure, if the requirements of the relevant provision, being paragraph 51A of the Eighth Schedule to the Income Tax Act, are met.
Prior to this concession, an ambiguity in the provision meant many tax practitioners advised clients to pass the residence up the chain of entities.In practice if a trust holds all the shares in a company, which in turn holds the residence, Sars now accepts that the residence may be transferred directly to the natural person beneficiaries of the trust, provided that the requirements of the provision are met. Therefore, only the company would have to be terminated and not the trust.
For this relief to apply, the most important requirements, in the above situation, are:
- The residence must have been used mainly for domestic purposes during the period from 11 Fe
February 2009 to the date of disposal by one or more beneficiaries of the trust or relatives (‘connected persons') in relation to such beneficiaries; and
- One or more of the above beneficiaries must be the acquirer/s of the residence.
This relief encompasses only capital gains tax, transfer duty, STC and dividends tax - the relief from STC and dividends tax applying if an interest in the residence, as opposed to proceeds from disposal of the residence, is distributed. So in the scenario above, where a trust holds the shares in a company that holds the residence, donations tax is of concern where the property is disposed of to the beneficiaries of the trust for below market value.
The mechanics of disposal can be complex. One needs to meet the requirements for exemptions from the various taxes. At the same time, one does not want to end up with a loan owing by beneficiaries to the company on termination of the company. If such a loan exists capital gains tax may be payable by the beneficiaries on cancellation of the loan.
When the trust is authorised by the trust deed to distribute capital to the beneficiaries and assuming that the market value of the residence is above the original cost to the company, the residence can be sold to the beneficiaries for an amount that is equal to, or less than, the balance of a loan account owing by the company to the beneficiaries.
This is subject to a caveat that the selling price must not exceed the cost of the residence to the company. When structured in this way, donations tax will not arise. This is because the sale at less than market value will, instead of being a donation by the company, be deemed to be a donation by the trust in terms of section 57 of the Act. Such donations are exempt from donations tax if the trust is authorised to distribute capital to the beneficiaries in terms of the trust deed. Further, since the property is being disposed of for an amount that is less than or equal to its cost to the company, no dividends tax will arise. The difference between the market value of the residence and the proceeds will in such circumstances be a dividend consisting of the in specie distribution of the residence, which is exempt from dividends tax under S64FA as it complies with the provisions of paragraph 51A.
Similar principles also provide relief in a scenario where a company owns all the shares in another company which holds the residence. In this case it is possible to transfer the residence directly to the shareholders of the holding company while the holding company would not have to be terminated.
This is on the assumption that the requirements of paragraph 51A and related provisions governing company multi-tier holding structures are met.The above concession is to be welcomed. As will be appreciated from the above discussion, taxpayers should be warned that the relevant provisions are complex and that, prior to undertaking such a restructuring, advice should be sought from a reputable professional.
By David Warneke, tax partner at BDO SA