I do,I do,I do... Why Live In Sin When You Can Reduce Your Tax Bill?
09 July 2011
Posted by: Author: Joan Hamman
I do,I do,I do... Why Live In Sin When You Can Reduce Your Tax Bill?
Persons, whether married or not, are separate and independent taxpayers, but be aware – SARS treats certain income differently according to marital status.Tax laws generally favour married over unmarried couples.
Taxpayers who are married in community of property are taxed on half of their own interest, dividend, rental income and capital gain and half of their spouses’ interest, dividend, rental income and capital gain, no matter in whose name the asset is registered (except for assets excluded from the joint estate).All other taxable income is taxed only in the hands of the spouse who receives that income.
Donations by natural persons that exceed R100 000 per annum are taxable at a rate of 20% on the value of any property disposed of gratuitously by a South African resident.This tax is payable within three months of the donation taking effect.Any donation between spouses is, however, exempt from tax. This means that assets can be used to facilitate tax savings.If one spouse earns more income than the other, it could pay to ensure that income-generating property is placed in the hands of the spouse with the lower income.(Be careful, you may plan for potential tax savings but SARS could disregard transactions as tax avoidance, if it is done solely to avoid any liability for tax.)
Unmarried couples cannot take advantage of this strategy.A donation (money or assets) valued at R500 000 between unmarried couples will attract donations tax of R100 000. If you were married this would be exempt.Investment Income Dividends received or accrued from South African companies are generally not subject to tax.Foreign interest and dividend exemption is limited to R3 700.Interest includes distributions from property unit trust and foreign interest and dividends.
The first R22 800 interest earned by an individual is exempt from tax (R33 000 for persons older than 65) but married persons enjoy a double benefit as each spouse gets this exemption.The combined interest earned by spouses married in community of property (ICOP) is taxed in equal shares in the hands of each spouse.Therefore the first R45 600/R66 000 earned by spouses married ICOP is exempt from tax.Couples married ICOP can therefore afford to earn more interest-free of tax.
Couples who are married out of community of property could also enjoy the double exemption but the difference is that the spouse who earned the interest remains taxable on that interest.This means that the benefit of a double exemption would be lost where only one spouse receives interest income.
Rental income from fixed property
Profits or losses derived from the letting of fixed property is divided in equal shares between couples married ICOP.Expenses incurred in earning the rental income are treated in the same manner.This can result in an unlimited tax benefit compared to the unmarried or married OCOP person who cannot share the profit or loss with his/ her partner.
The only way that unmarried persons and spouses married out of community of property could share profits/losses is where a formal agreement exists which stipulates a percentage ownership and profit share in the assets concerned, i.e. a partnership agreement.medical expenses to qualify for a deduction of medical expenses, it must firstly be paid by you; and secondly, it must exceed 7.5% of your taxable income, before this deduction. Only the spouse who actually paid for the medical expense can claim that expense in his/her tax return.Many couples make the mistake of sharing medical bills and effectively limiting their potential tax deduction. Married persons are entitled to plan a tax saving; for example, by arranging that the spouse with the lowest income pay for all medical expenses.The above is not influenced by whether you are married in or out of community of property, the tax treatment is the same.
Capital gains tax
Capital gains tax, applicable since 1 October 2001, applies to a resident’s worldwide assets and to a non-resident’s immovable property or assets of a permanent establishment in South Africa.CGTis triggered on disposal on an asset.The maximum effective rate of tax for individuals is 10%.Capital gains/losses are taxed in equal shares between couples married ICOP.An added benefit is that each spouse qualifies for the R20 000 annual exclusion.
Unmarried persons and spouses married out of community of property cannot share gains/losses with their partners, unless a formal agreement exists which stipulates a percentage ownership and profit share in the assets concerned.
Estate duty spouses married out of community of property
Estate duty is levied in terms of the Estate Duty Act, and constitutes a tax which has been levied at a rate of 20% on deceased estates.Under current legislation it is levied on the ‘dutiable amount of the estate’ exceeding R3,5 million.Therefore, the value of all your assets, which exceed R3.5 million upon your death will attract estate duty at a rate of 20%.Although any property left to your spouse on your death is not subject to estate duty, keep in mind that you are each entitled to the R3.5 million estate duty abatement.
If your estate presently exceeds R3.5 million, you could make a donation to your spouse to reduce your estate while increasing your spouse’s, meaning that you could save on estate duty on assets of up to R7 million.This ensures that you are both able to use the abatement and effectively pay less estate duty.The maximum possible tax saving could amount to R700 000 (R3.5 million x 20%) and is effective only for couples married out of community of property.If you are married in community of property, the total assets of your joint estate are split equally when the first spouse dies, thus it serves no purpose to donate assets between spouses.
Be aware of VAT on the marriage
Spouses married in community of property are, for VAT purposes, treated as an unincorporated body of persons. The joint estate created by the marriage is therefore treated as a person for VAT purposes, separate and distinct from the husband and wife. In practice, the registration as a vendor for VAT purposes will be in the name of either the husband or the wife, but this does not affect the principle that the registration and the normal VAT principles apply to the joint estate as a whole.
For example, a couple owns a farm which one spouse carries on an enterprise/trade. VAT will be payable on the whole farm should the couple sell their farm.The above will, however, not apply where the property is the sole property of the non-trading spouse and not part of the joint estate, e.g. a farm bequeathed to the wife and contractually excluded from community of property.It is therefore important to be informed of possible VAT implications that may have an impact on your assets where your spouse is registered as a vendor.
Source: By Joan Hamman (TaxTALK)