CAPITAL GAINS TAX - NEW CONCESSIONS FROM 2009

The Taxation Laws Amendment Act 2009 introduces two concessions relating to residential properties in South Africa.  As we explain below, however, one of them has a sting in the tail.

PRIMARY RESIDENCE EXCLUSION

As is by now well known, the first R1.5m of the gain on disposal of the primary residence of a taxpayer is excluded from CGT.  With effect from 1 March 2009 a further exclusion has been added, which will simplify things for many home owners.  If the proceeds of the disposal of a primary residence do not exceed R2m, then any gain or loss must be disregarded.

This should encompass many thousands of primary residences.  However, the provision only applies if, throughout the period from 1 October 2001, (when CGT was introduced), or the date of acquisition of the residence, whichever occurred second, the owner or spouse, or the beneficiary in the case of a special trust, used the property as a primary residence and did not use it for the purposes of carrying on a trade.

At first glance, this seems to be a concession, but it has within it a potential disadvantage.  If the residence is sold for less than R2m at a loss, which is quite possible in the current economic climate, the taxpayer loses the tax benefit of the capital loss, because the application of the provision is not optional.

TRANSFER OF DOMESTIC RESIDENCES FROM AN ENTITY

It seems that many taxpayers failed to take advantage of the opportunity to transfer their primary residences out of companies and trusts during the two year window period after 1 October 2001.  (See previous blog article regarding pitfalls) This left many such entities exposed to the CGT, the secondary tax on companies (and later its successor the dividends tax) and transfer duty implications of disposal in the future.  In addition, of course, residences held in a company or trust do not enjoy the primary residence exclusion.

Another window period has been established, from 11 February 2009 to 31 December 2011.  Where an interest in a domestic residence is transferred to a natural person or spouse in terms of this provision, and the qualifying requirements apply, the person (and spouse where applicable) and the entity are deemed to be one and the same person for CGT purposes.  In addition, the transfer, to the extent that it comprises a dividend, is not subject to STC, and transfer duty is not payable.

The qualifying requirements are that:

a) in the case of a company, the person or spouse held all the share capital or members' interest from 11 February 2009 until the date of registration of transfer.  In the case of a trust, the person or spouse disposed of the residence to the trust by way of donation, settlement or other disposition or financed all the expenditure incurred by the trust to acquire and improve the residence; and

b) the person alone or together with his or her spouse personally and ordinarily resided in the residence and used it mainly for domestic purposes as their ordinary residence from 11 February 2009 to the date of registration of transfer.

Important to note, is that if the property exceeds 2 ha in size, any portion in excess of that limit will not enjoy the benefit of the concession.

The concession also does not apply to the fairly common situation where the residence is housed in a company, all the shares of which are held by a family trust.

Interestingly, this provision refers to "domestic residence", of which there is no definition in the Act, and not "primary residence", of which there is.  It raises the question whether its use is deliberate or inadvertent.  Does it mean that it applies, for example, to a holiday home, which can quite easily meet the requirement of "domestic purposes" and "ordinary residence" without qualifying as the "primary residence"?  Or is it a slip of the pen? There have been no legal precedents in this matter and one suspects the latter to be the case, in which case we can expect "domestic" to be replaced by "primary" in the near future.

Finally, it is noteworthy that a condition for the R2m provision to apply is that the residence must have been used exclusively as the primary residence, whereas a residence housed in an entity may have been used partly for trade purposes.