Originally published in Recent Developments in Taxation, July 2011
In recent years, a popular way of saving tax was for a private residence to be held by a company or trust. However, as tax legislation changed and became more complex, the benefits of such structures became redundant, so much so that the disposal of a residence by a company or a trust now has many adverse tax consequences. In attempting to remedy this, the SARS is currently offering a tax dispensation to companies and trusts to transfer property from the holding entity into the hands of a person, free of tax.
However, this tax dispensation is restricted to ordinary residences that are mainly used for domestic purposes by individuals who are connected persons to the holding entity. Hence holiday homes were excluded.
This restriction was not necessarily intended by the legislature. Therefore, in terms of the Draft Taxation Laws Amendment Bill, 2011, (TLAB) and much to the relief of taxpayers, it is proposed that the scope of the tax dispensation be broadened to include holiday homes and/or second homes, provided that these are mainly used for domestic purposes.
In the SARS' Guide to the Disposal of a Residence from a Company or a Trust issued on 11 May 2011, it is stated that the word "mainly" is interpreted to mean more than 50%, which percentage is generally measured on a floor-space basis. Examples of non-domestic use, which could jeopardise the trust or company's eligibility for relief, include the letting of a portion of the residence (i.e. a bed and breakfast) or using part of the residence as an office.
It should be noted that the proposal under the TLAB will, if promulgated, apply with retroactive effect on the same conditions as the current tax dispensation, which are that:
- the disposal of the property takes place on or after 1 October 2010, but no later than 31 December 2012;
- the property is mainly used for domestic purposes by natural persons who are connected persons in relation to the company or trust; and
- steps are taken to terminate the transferor company or trust within a period of six months after the disposal of the property.
Where the relief applies, the transfer of the property will not give rise to any capital gains tax (CGT), transfer duty or secondary tax on companies (STC).
Individuals acquiring a property from a company will establish a base cost for the property at an amount equal to the aggregate of their base cost for their shares and the cost of all improvements to the property subsequent to their acquisition of the shares, if:
- the individual that acquired the property (together with the other persons holding shares in the company) acquired all the shares in the company after it acquired the property; and
- 90% or more of the market value of the assets held by the company, during the period commencing on 11 February 2009 until the date the property is disposed of, is attributable to the company's interest in the residence.
In short, this means that the individual's base cost for his or her shares (plus the capital improvement costs), will be rolled-over to the property acquired.
In the event of individuals acquiring the property from a company and the above provisions not applying, or if the property is acquired from a trust, the acquiring individuals will "inherit" the CGT base cost position of the transferor company or trust, (i.e.: the transferor's base cost is rolled-over to the acquirer).
Under the current tax dispensation there appears to be no restriction on the person to whom the property can be transferred. In effect, this means that the property can be directly transferred, tax free, to any third party. The provisions under TLAB clarify this, as potential transferees are limited to those persons who are connected to the company or trust and who mainly used the residence for domestic purposes.
Taxpayers are urged to simplify their structures and to make use of the extended relief offered by the SARS.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.