November 14, 2009
By Laura du Preez
If you have a residential property in a company, a close corporation (CC) or a trust and you would like to transfer it into your own name, now is the time to do so.
The Taxation Laws Amendment Act, which was promulgated at the end of September, gives you until the end of 2011 to transfer residential property that you use mainly for domestic purposes into your own name without any tax consequences.
The window period, which in terms of the initial proposals was supposed to operate from January next year, has been extended. It will now apply retrospectively to a property transferred from a company, CC or a trust into your own name since February 11 this year, when the relief measure was announced in the Budget.
During the window period, you can transfer the property into your own name without paying transfer duty, the company or CC will not have to pay capital gains tax (CGT) or secondary tax on companies (STC) on the transfer, and the trust will not have to pay CGT on the transfer.
If you take up the offer, any CGT that otherwise would have been levied on the company, CC or trust will effectively be deferred until you dispose of the property.
The base cost at which the company, CC or trust obtained the property will be regarded as your base cost for CGT purposes.
A similar window period was made available in 2001 and 2002 with the introduction of CGT and ahead of changes to the Transfer Duty Act.
Trusts now included
During feedback on this year's initial proposal to allow you to transfer residential property out of a company and into your own name, tax advisers said many people who had property in a trust had not taken advantage of the first opportunity to transfer property into their own name and still wished to do so.
The proposed tax-free transfer was thus extended to include people with properties in trusts who want to transfer the properties into their own names, as was the case in 2001 and 2002.
A further reason you are being offered this window period is because annual fees are imposed on companies under the Com-panies Act, and the fees can be avoided if the property is transferred into your own name and the company is deregistered.
Kemp Munnik, a tax director at auditing and accounting firm BDO, says the tax-free transfer has been extended to include property used mainly for domestic purposes, instead of being restricted to property used exclusively for domestic purposes.
The original proposal excluded property owners who maintain an office or a studio at home, let a garden flat or who take in a paying guest.
Munnik says once the property is in your own name, not only will the effective tax rate be lower, but you will enjoy CGT relief of up to R1.5 million on the gain you make when you dispose of the property as your primary residence. Trusts, companies and CCs do not enjoy this relief.
Some properties excluded
Munnik says although the relief has been extended to residential property held in a trust, it will not apply to a residential property held in a company that in turn is held by a family trust.
Also, the relief will apply only to a residence donated to a trust by you, as the resident of the property, or if you financed the acquisition of the property.
You will not enjoy relief if your residential property is held in a trust and the trust has raised a mortgage bond to finance the property and pays the bond out of its own means, Munnik says.
The legislation refers to the property being your "ordinary residence". Properties that are not used as an "ordinary residence" (for example, a holiday home or a vacant plot) will not qualify for the relief, he says.
Munnik says the property need no longer be a company's sole asset, nor will it be necessary to liquidate the company after the disposal of the property, as was proposed originally.
To qualify for the relief, you must have put your home into a trust, CC or company before February 11 this year.
STC exemption to go
David Warneke, a tax partner at Cameron and Prentice Chartered Accountants, says if you have property in a company or a CC, you should be aware that the exemption from STC when you deregister the company will fall away with the introduction of dividends tax, which will replace STC probably late next year or in early 2011. This could pose a problem if you bought the property through a company before CGT was introduced in October 2001.
Warneke says if you bought a shelf company before October 2001 and the shelf company then obtained a property, the increase in the value of the property between the purchase date and the date on which CGT was introduced is known as pre-2001 embedded value.
For example, he says, if you bought a property for R1 million in 1991 and in October 2001 the property was worth R3 million, the pre-2001 embedded value is R2 million.
Warneke says if the company now sells the property for R5 million and is deregistered, no STC will be payable on the pre-2001 embedded value, and STC will be levied only on the increase in value from October 2001 until the date of disposal - that is, on the increase from R3 million to R5 million (R2 million). But this will change when dividends tax is introduced, as the exemption regarding the pre-2001 embedded value will fall away.
After dividends tax is introduced, the full increase in the value of the property (R4 million in the example) will become subject to dividends tax, which would amount to R400 000 (10 percent of the proceeds of R5 million less the cost of R1 million).
Don't forget your tax return
If you have not yet submitted your tax return, you have only days left to do so - the deadline is Friday, November 20.
Despite some reports of problems with the eFiling website over the past weekend, the South African Revenue Service said this week that the deadline would not be extended.
The only exception will be for provisional taxpayers who do not have any outstanding tax returns and who will file through a tax practitioner using the e@syFile system. If you are one of these taxpayers, you have until February 28 next year to complete your return, but you must be prepared to pay any tax due on assessment within seven days of your assessment being issued.
