New relief in respect of share block
17 July 2012
Posted by: SAIT Technical
By Ben Strauss (DLA Cliffe Dekker Hofmeyr Tax Alert 13 July 2012)
Under share block, a company holds immovable property and in turn, the shareholders hold shares in the company and a right to use some or all of that property exclusively for a specified period in every year.
Although share block is less popular now, many share block companies are still in operation.
The Share Blocks Control Act, No 59 of 1980 regulates share block. Among other things that act provides for a company to convert share block into sectional title. Provided certain requirements are met, the conversion does not trigger any transfer duty, capital gains tax (CGT) or value-added tax (VAT) consequences for the shareholders or the company.
However, no similar tax relief was available if the company simply transferred 'freehold' property or sectional title properties (otherwise than as a result of a conversion) to its shareholders. The draft Bill proposes that the relief now be extended to cover those cases.
It is proposed that, to qualify for the relief, the shareholder must acquire a specified part of the immovable property to which that person had a right of exclusive use. Further, for the transfer duty relief to apply, the initial acquisition of the shares in the company must have been subject to transfer duty.
As to CGT, the base cost of the shares in the hands of the shareholder effectively becomes the base cost of the part of the immovable property acquired.
The transfer will also be free of dividends tax in the hands of the shareholder.
For example: A share block company owns a number of plots of seafront land. A house was built on each plot. Each shareholder of the company has the right to exclusively use one of the houses. The company would be able to transfer each plot (with the house) to the shareholder holding the exclusive right of use in respect of that plot free of CGT, dividends tax and VAT. The transfer would, however, only be free of transfer duty in the hands of the shareholder if the shareholder was liable for transfer duty when he acquired the share initially. If not, the shareholder would now have to pay transfer duty when he acquires the plot.
It appears as if the proposed relief ties into the policy of the Government to reduce the number of companies that purely hold residential type immovable property and the related tax relief provided to persons who wish to remove residential property from companies and close corporations (that are not share block companies), which endures until 31 December 2012.
The further relief takes effect on 1 January 2013. So, while persons who want to take advantage of the relief can start planning, they must wait until then to implement any steps.