TRANSFERRING A PRIMARY RESIDENCE FROM A COMPANY, CLOSE CORPORATION OR TRUST – THE WINDOW OF OPPORTUNITY – CAPITAL GAINS TAX AND OTHER TAXES.

1. Companies and trusts are liable for CGT on disposal of a residence. 

• Only natural persons and Special Trusts are entitled to exclude the first R1.5 million of gains on disposal of their Primary Residences.  This exclusion does not apply where the residence is owned by a company, close corporation or trust.(Not Special Trust).
• Hereafter the term “company” will be used to refer to a company or close corporation. (CC).
• Many individuals have historically purchased their residences in companies or trusts for a variety of reasons, including protection from creditors, avoidance of transfer duty and estate duty etc.  Selling the shares and loan accounts (Companies) and member’s interests and loan Accounts (Close Corporations) where the major asset is a residence is no longer exempt from transfer duty.  In addition, Capital Gains Tax is payable at 14% and Secondary Tax on dividends is payable when drawing the proceeds after the sale of the residence by the company.
• Compare this with an individual owning his/her Primary Residence.  The maximum Capital Gains Tax is 10%.  There is also an annual CGT exclusion of R17 500.00.  Individuals are entitled to an exclusion of R1.5 million on the gain on the disposal of a primary residence or the disposal of a primary residence for an amount of R2 million or less.

2. Simple comparative example:

• In December 2008, an individual sells his/her primary residence for R2.5 million.  (for simplicity, agents commission and other costs are ignored – see our website – www.robmenzies.co.za /Property Law/Capital Gains Tax for more details).
• The property was purchased in 2003 for R1.2 million.  Capital Gain = R1.3 million.  As there is an exclusion of R1.5 million in respect of the sale of the Primary Residence, no CGT is payable.
• Now compare this to a Company.  In December 2008, the company sells its residential property (which if it had been held by an individual would be a Primary Residence) for R2.5 million.  (again for simplicity, agents commission and other costs are ignored). 
• The property was purchased in 2003 for R1.2 million.  Capital Gain therefore equals R1.3 million.  As it is held by a company, the R1.5 rebate will not apply.
• CGT = R1.3 million x 14% = R182 000.00.  In addition, Secondary Tax on Dividends (STD) may be payable.  The STD payable will depend on the structure of the company and how much is being taken out of the company as a dividend.  Lets say this amounts to R65 000.00.  Total payable therefore is R182 000.00 + R65 000.00 = R247 000.00.  Compare this with 2 b) above.
• The advantage of registering your primary residence in your own name is obvious.

3. A window of opportunity.

• When CGT came into force on the 1st October 2001, a window of opportunity was granted to individuals to transfer their Primary Residences out of their companies or trusts into their own names without incurring adverse tax consequences.  This window of opportunity terminated on the 30th September 2002.  If you think back to those days, property prices were still relatively low after the 1998/1999 property recession in South Africa.  It was only after that that property prices began to dramatically escalate.  In 2008 the worldwide recession put a brake on this escalation and property prices fell.
• The consequence of this is that in 2001/2 many who held their primary residences in a company or trust did not see the financial benefits in spending money to transfer the property to take advantage of the window of opportunity.  The costs of attending to such a window of opportunity transfer of a property worth R1.2 million was approximately R14 000.00.  In addition the bond had to be cancelled and a new one registered or alternatively the bank could agree to a substitution of debtor in terms of Section 57 of the Deeds Registries Act.  These issues were considered daunting and not worth the trouble.  As a result many, if they were aware of the window of opportunity in the first place, did not take advantage of it.  When they realised what they had missed, there was much weeping and gnashing of teeth.

4. Now there is a new Window of Opportunity – do not miss the boat, but be cautious.

• Note that this window of opportunity also applies to primary residents registered in the name of a Trust.  But different considerations may apply to a Trust.  If it is considered that the Primary Residence is going to be kept in the family beyond the lifetime of the main financier, or if the Trust has been structured to protect against creditors’ claims in a dangerous world; to save Estate Duty; to save estate costs and the like, keeping a primary residence in a trust may make sense.  Consult your legal or financial adviser where a primary residence is registered in the name of a Trust.
• This Newsletter sets out what is exempt and the conditions that need to be satisfied to secure a transfer, free of the taxes referred to in 5 below.
• If you have a bond on the property which is going to be transferred in terms of the window of opportunity, consult with your bank.  You do not want to spend time and money and find that the bank now considers you a credit risk and will not give you a new bond or agree to the substitution of debtor.

5. What Taxes are Covered?

In transferring a Primary Residence from a Company or Trust, the window of opportunity provisions offer exemption from:

• transfer duty on the transfer of the residence;
• stamp duty on the transfer of shares in a share block company;
• secondary tax on dividend; and
• capital gains tax on any gain realized by the company or trust.  See above.  This must not be confused with the eventual sale of the property where CGT is payable but on the basis of the seller being an individual and the property being a primary residence.

6. Requirement to be complied with are as follows:
   1. The residence must be acquired by an individual or individuals.  If the shares and loan accounts or member’s interests and loan accounts are registered in the name of one spouse, then the property can be registered in the name of either spouse or both of them jointly. 
   2. The residence acquired must constitute the individuals’ “primary residence” as defined.
   3. The acquisition must take place between:
   1. The date of promulgation of the Taxation Laws Amendment Act, 2009, being 11th February 2009; and
   2. 31st December 2011.
   4. The individual alone or together with his or her spouse must hold all the equity share capital of the company or member’s interest in the close corporation, between:
   1. 11th February 2009; and
   2. the date of registration in the deeds registry.
   5. Between 11th February 2009 and the date of registration, the individual and his or her spouse must have:
   1. ordinarily resided in the residence; and
   2. used it mainly for domestic purposes as his or her or their primary residence.
   6. It follows that individuals acquiring their residences in a company or trust after 11th February 2009 will not qualify for the exemption.
   7. The interest in the residence must have been distributed or disposed of on or before 31st December 2011.
   8. Where the property is held by a subsidiary company, the exemption will not apply.
   9. The last day for registration in the Deeds Office is 31st December 2011.

1. Trust:  The donation or financing requirement

• The Natural Person/s taking transfer must have disposed of the residence to the trust by way of donation, settlement or other disposition.

2. Shares in a share block company

Where:

• the residence is held by a share block company; and
• the shares in that share block company are held by a company or trust, transfer to the individual will be exempt from stamp duty.

This stamp duty exemption is subject to the same conditions as the transfer duty exemption.

3. Transfer of land with a residence

• The exemption applies in respect of the portion of the land on which the residence is situated and unconsolidated adjacent land that meets the following requirements:
• The exemption does not apply to land that exceeds 2 hectares.  If, for example it is a farm, there will be a pro-rata adjustment between the residence and 2 hectares and the rest of the farm.
• The exemption does not apply to holiday homes.
• Any land transferred must be used mainly for domestic purposes together with the residence from 11th February 2009 to the date of registration.
• Any land transferred must be disposed of at the same time and to the same person as the residence.

4. Costs of the transfer

Although there will be no adverse tax consequences from such a transfer, one must bear in mind that there will be costs.  These include the conveyancing attorneys’ registration of transfer costs, and where applicable, the costs of bond cancellation and re-registration or substitution of debtor.  See the summary at the beginning of this note.

5. Other requirements

It may be necessary to liquidate or deregister the company in order to extract any capital profit free of STD (section 64B(5) of the Income Tax Act).

6. The Capital Gains Tax Exemption

When the individual acquires his/her Primary Residence from a company or trust as described herein, the base cost is that which applied at the time the company acquired the property and not the date on which it is registered in the name of the individual.

7. Valuation

A valuation should be obtained of the property at the time that the property is being transferred in terms of the window of opportunity.  An estate agent’s valuation should be acceptable to SARS.

8. Quotation for costs

If you would like Rob Menzies & Associates Inc., to let you have a quote for the costs of transferring a property in terms of this window of opportunity, please phone 031 563 3916 or email info@robmenzies.co.za.

Note - Disclaimer
This Newsletter is a summary of some of the Legislation.  The issues are sometimes complicated and we strongly recommend you seek professional advice when dealing with any CGT matter.
While every care has been taken in the drafting of this Newsletter, no liability is accepted for any errors, omissions or inaccuracies contained herein