The aim of this guide is to provide guidance on the application of paragraphs 51 and 51A of the Eighth Schedule to the Income Tax act, promulgated by the Taxation Laws Amendment Act, with its main focus on the newly introduced paragraph 51A and only a brief overview of paragraph 51.
Paragraphs 51 and 51A deal with the window periods during which a residence can be transferred from a company, close corporation or trust to individuals without incurring any liability for Transfer Duty, Capital Gains Tax, Secondary Tax on Companies and the yet to be implemented Dividends Tax.
The Impact of the legislation on the procedural aspects of conveyancing is not huge, apart from a few slight changes to the normal transfer documents, and the draft guide, in my opinion serves more as a guide to when the said paragraphs would apply and how to make use of this opportunity in order to get the best possible tax benefit from it, rather than as a guide to conveyancers on how to deal with the transfer in pursuance of the said legislation.
Nevertheless, the guide is very informative and makes a potentially complicated piece of legislation quite digestible.
However, being a conveyancer and not a tax- or commercial lawyer, I will have to restrict my comments to conveyancing related aspects as I am in no position to comment on the technical details and intricate legalities of tax legislation.
Paragraph 51 introduced a window period whereby residences could be transferred from a Company, CC or Trust to an individual (including his/her spouse) without incurring any obligation for Transfer Duty, Capital Gains Tax or Secondary Tax on Companies. The window period was available for disposals made between 11 Feb 2009 and 30 September 2010 and registration of the transfer had to be effected by 31 December 2011.
On 1 October 2010 a new, more flexible window period was provided for by the promulgation of paragraph 51A. The window period for paragraph 51A transfers is available for disposals between 1 October 2010 and 31 December 2012.
Paragraph 51A is more flexible than paragraph 51 in the sense that it extends the ultimate qualifiers for the acquisitions to connected persons in relation to a company, CC or trust and not only spouses of the shareholders, members and/or trustees. Paragraph 51A also puts no limit to the timeframe in which the transfer has to be registered and it also allows for residential property entities to be liquidated or dissolved with limited compliance and enforcement.
Paragraph 51 will apply to residences acquired unconditionally on or before 30 September 2010 and these transactions will have to be registered on or before 31 December 2011.
Disposals made before 30 September 2010 (i.e. within the paragraph 51 window period), but which were subject to suspensive conditions and which suspensive conditions were only complied with after 30 September 2010, will however have to be addressed under paragraph 51A, as the actual date of disposal is deemed to be the date on which all suspensive conditions are complied with.
In order to determine whether a transaction is to be dealt with under paragraph 51 or 51A, the date of disposal is therefore quite important. The date of disposal is deemed to be:
- In the case of an agreement subject to suspensive conditions, the date on which the suspensive conditions are complied with.
- In the case of an agreement not subject to suspensive conditions, the date on which the agreement is concluded.
- In the case of a distribution of an asset of a trust to a beneficiary, the date on which the beneficiary has a vested interest in the distribution.
Clearly transfers in pursuance of paragraph 51 will still be taking place up until 30 December 2011 in parallel with transfers in pursuance of paragraph 51A and therefore I thought it would be helpful to do a comparison between the requirements of the respective paragraphs.
Comparison between Paragraph 51 and 51A
- Applicable to disposals between 11 Feb 2009 - 30 September 2010
- No need for liquidation, winding up, deregistration or revocation of the entity
Ultimate acquirers (Company / CC)
An individual and/or Spouse who individually or jointly holds all the Share Capital or Members Interest in the Company or CC
Ultimate acquirers (Trusts)
Transferee and/or spouse must have donated or incurred all expenses with regard to the acquisition by the trust
- Transferee/s must have ordinarily resided in the property during 11 Feb 2009 to date of registration
- Transferee/s must have used property mainly for domestic purposes during 11 Feb 2009 to date of registration
- Land on which the residence is situated must not be larger than 2ha
- Registration of transfer to take place before 31 Dec 2011
- No Multi-tier Transfers
- Applicable to disposals between 1 October 2010 - 31 December 2012
> Steps for liquidation, winding up, deregistration of Company or CC must be taken within 6 months after disposal
> In the case of a trust - the founder, trustees and beneficiaries must have agreed in writing to the revocation of the trust or they must have applied to court for the revocation of the trust
Ultimate acquirers (Company / CC)
One or more natural natural persons who ordinarily resided in the residence from 11 February 2009 until the date of acquisition and were connected persons in relation to the Company / CC
(*see definition of connected persons in draft guide)
Ultimate acquirers (Trust)
One or more natural natural persons who ordinarily resided in the residence from 11 February 2009 until the date of acquisition and were connected persons in relation to the Trust
(*see definition of connected persons in draft guide)
- Transferee/s must have ordinarily resided in the property during 11 Feb 2009 to date of disposal
- Transferee/s must have used property mainly for domestic purposes during 11 Feb 2009 to date of disposal
- No restriction on the size of the land
- No limit to the date of registration
- Multi-Tier Transfers is possible, although there must firstly be a disposal to the entity holding the shares and then a further disposal to one or more natural persons who qualify as acquirers
Multi - Tier Transfers
Paragraph 51A furthermore allows for Multi-Tier transactions (which were not possible under paragraph 51) due to the extension of qualifying acquirers to also include connected persons. Paragraph 51 only allowed for transfers to a natural person or his/her spouse who jointly or individually held all the share capital or members interest, or incurred all expenses with regard to the acquisition of the property by the trust.
The definition of "connected person" in the Income Tax act includes:
In relation to a natural person -
(i) any relative, and
(ii) any trust of which such a natural person or such relative is a beneficiary
In relation to a trust -
(i) any beneficiary of such trust, and
(ii) any connected person in relation to such beneficiary
In relation to a company -
(i) any person who individually or jointly with any connected person in relation to himself holds, directly or indirectly, at least 20% of the company's equity share capital or voting rights
In relation to a CC -
(i) any relative of a member or any trust which is a connected person in relation to such member.
This means that transfers are not only restricted to natural persons and their spouses, but are also available to "connected persons" on the condition that the connected persons comply with the ordinarily resident and domestic use requirement. Where a trust however holds the shares / members interest in the transferring company or CC, it is held that there must first be a disposal of the property to the entity holding the shares / members interest and then a further disposal to the individuals who qualify as acquirers before 31 December 2012. Both these disposals will be free from Transfer duty, Capital Gains Tax and Secondary Tax on Companies.
Ultimately a qualifying acquirer of a residence is one or more natural persons who ordinarily resided in the residence from 11 February 2009 until the day of acquisition and were connected persons in relation to the company or trust during that period.
Calculation of Base Cost
Where an interest in a residence has been transferred from a company or trust to a natural person it is deemed to have been disposed of for an amount equal to the base cost of that interest.
Two scenarios are to be taken into account in the case of companies, namely: -
- Where shares are acquired in a company which already owns a residence at the time the shares are acquired.
- Where the residence is acquired by the company after the shareholders have already acquired their shares in the company.
Shares acquired in Company already holding the residence
The acquirer is deemed to acquire the residence for an amount equal to the cost of the shares plus the cost of any improvements effected to the residence after the shares were acquired.
Residence acquired by company after shareholders acquired their shares
Base Cost of the residence for the acquirer is determined by means of a roll-over.
I have received numerous queries from Conveyancers as to which amount to reflect as the base cost in their deeds and transfer duty declarations and I think that clear guidelines on this should be made available to Conveyancers. Some of the questions that I have received regarding this were inter alia:
- Is the base cost to be used the original purchase price as indicated on the deeds office search or is it the current market value of the property?
- What supporting documentation is necessary to establish this value and will SARS insist on any proof of this to accompany the TD application?
- Must this value be indicated on the TD 1 & TD2 Declarations or is it sufficient to refer to the fact that it is a transfer in pursuance of paragraph 51 or 51A?
I am sure that guidance from SARS in this regard would be greatly welcomed by Conveyancers across the board.
Another area where guidance from SARS could be very helpful is with regard to the declarations to be made in the affidavit which is to accompany the application for the transfer duty exemption certificate.
I looked at the guidance originally given to us by Antoinné van Deventer (as published in GhostDigest on 3 December 2009) with regard to the declarations to be made in the supporting affidavit to SARS and compared them with the requirements in terms of paragraph 51A and have identified the following changes that need to be effected to the affidavit that is currently available in GhostConvey for transfers in pursuance of paragraph 51. The changes are as follows:
- Reference to the fact that the transferee(s) is/are connected persons in relation to the transferring Company/CC/Trust.
- The period in which the transferee(s) was/were ordinarily resident in the property and used it mainly for domestic purposes should be amended to read "as at 11 February 2009 to the date of disposal" and not "to the date of registration".
- Reference to the fact that the property is less than 2 hectares in extent should be removed from the affidavit.
- Reference to the fact that the transferee individually or jointly together with his/her spouse holds all the share capital or members interest in the Company or CC should be removed from the affidavit. (I am however unsure as to whether SARS would require a reference to the date on which the transferee acquired shares or members interest in the Company or CC and direction from SARS in this regard would be greatly appreciated).
- Reference to the fact that the transferee or his spouse donated the property to the trust or incurred all the expenses in relation to the acquisition of the property by the trust should be removed from the affidavit.
- It is uncertain whether any declaration with regard to the proposed steps for liquidation/winding up/deregistration/revocation of the Company/CC/Trust is to be made in the affidavit and whether SARS would require any proof thereof or not.
As mentioned before, I have come to the above conclusion purely by comparing the requirements of both paragraphs read together with the initial guidelines we received from SARS in respect of paragraph 51. Proper guidelines from SARS with regard to issues like the calculation of the base cost and supporting documents which are to be submitted to SARS with the application for the Transfer Duty Exemption Certificate would be of great value.
Nadia de Kock
Your comments would be appreciated - [email protected]
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