Originally published in Recent Developments in Taxation,
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
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
steps are taken to terminate the transferor company or trust
within a period of six months after the disposal of the
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,
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Effective collaboration amongst government agencies, automation of processes and capacity building by tax authorities have always been identified by stakeholders as strategies for achieving an efficient tax system.
In response to information provided by FIRS, NSE has sent letters to publicly listed companies, who were purportedly identified by FIRS as non-compliant.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).