An amended Taxation Laws Amendment Bill was published by SARS on the 1st September 2009. This version of the Bill in some respects changes the original proposal on which I commented in an earlier note - Company owned homes. That note should be read in conjunction with this update. The amended section of the Bill has been widened to include the transfer of a home from a trust to a beneficiary of that trust if the beneficiary had contributed to the cost of acquisition and maintenance of the home and the beneficiary and spouse have resided in that home.
Although the Bill is still to be approved and promulgated, the new section is deemed already to be in operation. Accordingly a company or trust which qualifies may immediately divest a residence to a shareholder or beneficiary.
The Bill no longer requires the divestment of a "domestic residence" but instead an "interest in a residence". The concession is not limited to what would be defined as a primary residence. However the natural person or spouse who wishes to acquire transfer must personally have resided in the residence from the 11th February 2009 to the date of transfer. Therefore a tenanted property would not qualify. A holiday home in which the shareholder "ordinarily resided" might qualify. The residence must be situate on land which is less than 2 hectares in extent.
The primary benefit of divesting a qualifying company or trust of its immovable property is that CGT will be payable at a lower rate and will be deferred until the subsequent disposal of the property by the shareholder or beneficiary. At the date of disposal, CGT will be calculated on the gain accruing from the date of acquisition or 2001, whichever is the later, but at individual rates. In addition the primary residence exemption may apply. The distribution of the property will remain exempt from STC and transfer duty.
The benefit of the new section to a trust is likely to be advantageous primarily to a vesting trust with a sole beneficiary. The retention of a residence in a discretionary trust may continue to provide estate planning benefits if the beneficiary has a potential estate duty liability. If estate duty is not a factor then divestment of the property to the beneficiary would be advantageous because of the reduced rate of CGT and the possible benefit of the primary residence exemption.
A natural person who is a shareholder of a company or a beneficiary of a trust which owns a domestic residence should consult his or her legal advisor to ascertain whether the provisions in the Bill are applicable to the residence and whether it would be beneficial to take transfer of the residence from the company or trust. In most cases it will make sense to transfer a residence from a company to its shareholder.