The final rules for the tax-free transfers will be contained in paragraph 5lA of the Eighth Schedule to the Income Tax Act, 1962. The rules have undergone a number of refinements since first released for public comment during May and it is appropriate therefore to summarise the framework regulating the tax-free transfers of certain residences from companies, close corporations and trusts.
In accordance with paragraph 51A(1) of the Eighth Schedule to the act, the interest in the residence must be disposed of by a company, including a close corporation or trust, on or before December 31 2012.
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The property must be transferred to natural persons who are connected persons in relation to the company or trust and that typically means that they are beneficiaries of the trust or shareholders of the company or members of the close corporation.
It is critical that once the property has been transferred from this company or close corporation that the company from which the property was transferred has within six months taken steps to liquidate, wind up or deregister, or where it is a trust, dispose of the residence; the founder, the trustees and the beneficiaries of that trust have agreed in writing to the revocation of the trust; or alternatively, that an application has been made to court for the revocation of the trust.
The purpose of paragraph 51A is to allow persons who own their homes in companies or close corporations of trusts to take ownership without incurring tax costs, but at the same time to remove either companies or trusts from the tax register. The South African Revenue Service sees this as a means of increasing efficiencies in tax administration.
In accordance with paragraph 51A(2), the company or trust disposing of the residence is deemed to have disposed of that residence for an amount equal to the base cost of the interest in that residence as at the date of disposal. On this basis, no CGT can arise when the property is transferred from a company or close corporation or trust to a natural person. It is therefore not possible to step up the cost of the property for CGT purposes.
Paragraph 51A distinguishes between transfers of residences to persons who bought shares in a company after the company acquired the residence and cases where shareholders created the structure that owns the residence in question.
If the company in question owns other assets, and the residence does not amount to 90% or more of the market value of the assets held by the company, the relief is not available where the company was acquired by a taxpayer at the time that it owned the property.
In those cases where a natural person takes transfer of the property from a company and paragraph 51A(3) does not apply, the base cost for the natural person taking transfer of the property is the same as the base cost of the property to the company concerned.
Paragraph 51A(5) of the Eighth Schedule to the act deals with those residences owned by a trust that are ultimately transferred to a natural person, and provides that the date of acquisition of the residence by the trust will be deemed to be the date on which the natural person acquired the asset in the event that the residence is disposed of later. Any expenditure incurred by the trust in acquiring the property will be deemed to have been incurred by the natural person taking transfer of the property as well.
Previously, the government made it clear that it would only entertain transfers of fixed residences from companies or close corporations directly to a natural person, or from a trust directly to a natural person, and that it would not allow for tax-free transfers from multiple-tiered structures, whereby residences would be transferred from a company owned by a trust of which a natural person was a beneficiary.
The bill, as introduced in Parliament, now allows for tax-free transfers when residences are owned in multiple-tiered structures, and the effect of this is that the residence can be transferred free of taxes from a company to a trust and ultimately to a beneficiary of a trust as long as the conditions contained in paragraph 51A of the Eighth Schedule are complied with.
The quid pro quo for transferring residences free of taxes from a company or trust structure is that the company or trust that previously owned the residence must be terminated.
Paragraph 51A requires that the disposal of the residence takes place from a trust or company to a natural person on or before December 31 2012.
The advantages of applying for the relief available under paragraph 51A is that the residence may be transferred free of CGT from a company or trust to a natural person, and that when the residence is finally disposed of the exemption applicable to the primary residence will then apply to the capital gain realised on disposal of the primary residence.
Furthermore, the legislation provides that no transfer duty will be payable on such transfers and in addition no STC will arise by virtue of section 64B(5)(kA). It must be remembered that when the residence is owned by a trust and it is transferred to a natural person, that will increase the value of the natural person's estate for estate duty purposes once that person dies.
The relief available in paragraph 51A is now wider than what was mooted in the draft bill released for comment during May.
Therefore, persons residing in residences owned by companies or trust structures should evaluate their circumstances to determine whether it is appropriate to transfer those residences out of the structures and into their own names, thereby taking advantage of the concessions available in the legislation whereby no CGT, STC or transfer duty will be payable.
Clearly, to give effect to the tax-free transfer it will be necessary to complete documents for submission to SARS and the Deeds Office and it remains to be seen when these documents will be released.
In practice it would make sense that when the residence is owned by a trust, for the trust merely to award the property to the natural person who is a beneficiary of the trust, and in the case of a company, to award the property as a dividend to the shareholder being a trust or natural person.
When the company is owed by a trust it would be necessary to transfer the property from the company to the trust and ultimately to a natural person beneficiary in order to utilise the concession available in paragraph 51A of the act and related exemptions contained in the bill.
Dr Beric Croome is a tax executive at ENS. This article first appeared in the November 2010 edition of “Business Law & Tax Review” in Business Day
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