RESPONSE TO THE ARTICLE DATED 10 DECEMBER 2009 BY THE TAXPAYER SERVICE FOR THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE AS DISTRIBUTED IN THE GHOST DIGEST NEWSLETTER NO 338 OF 10 DECEMBER 2009
This article provides a very useful guide and framework for dealing with the Transfer Duty exemption aspects of transfers arising from the moratorium for CGT and Transfer Duty relating to transfers of "a principal place of residence" from a corporate entity to the natural person or persons who have the use of the property as a principal place of residence.
There is however one aspect that I believe needs to be reconsidered by the Commissioner and his staff, and that is the aspects dealt with in paragraphs 3.6 and 4.2 , dealing with transfers from trusts.
The article indicates clearly that it is the view of SARS that in the case of a trust there cannot be more than one transferee. This is based on what I suggest is a mistaken interpretation of what paragraph 51(2)(b)(ii) to the 8th Schedule to the Income tax Act says.
Before going further I think it is very important to look at the provisions of section 6 of the Interpretation Act No 33 of 1957, as it deals with the interpretation of provisions in legislation dealing with number. The section says;
"6 Gender and number
In every law, unless the contrary intention appears-
(a) words importing the masculine gender include females; and
(b) words in the singular number include the plural, and words in the plural number include the singular."
In looking at 51(2)(b)(ii) the writer of the article has clearly interpreted the reference to "that natural person" which is in the singular, as intending a restriction to one person when a transfer from a trust is involved. The writer may try to justify this by contrasting paragraph 51(2)(b)(i) as specifically contemplating the natural person "together with his or her spouse", and thus more than one transferee, with paragraph 51(2)(b)(ii) which makes no reference to a spouse, as implying an "intention" that indicates contrary to an interpretation of plurality. I cannot agree with this.
The reason for the words "together with his or her spouse" in paragraph 51(2)(b)(i) is that in the case of the company (and CC) scenario the test is one of ownership and the reference to the natural person and spouse is to make it clear that the in the case of a company or a CC the test is both the ownership of shares or a members interest and to relate that to the plurality in paragraph 51(2)(c). The test is thus that the ownership of shares or members' interests should coincide with the occupation as a principal place of residence.
In the case of a trust there can be no question of ownership but the tests provided are disposition to the trust of the property by donation or the financing of the purchase and improvement of the property.
If a husband and wife, married out of community of property, together owned a property and then, at some time prior to 11 February 2009, together donated and transferred the property to the trust, what justification can there be, in the light of section 6 of the Interpretation Act, to limit "natural person" to a singular interpretation? In the same way if spouses married out of community of property together financed all the expenditure, on what logical basis can they be excluded from the benefits of this moratorium?
The author of the article makes the bald statement that "Two parties cannot each finance all relevant expenditure" as justifying the interpretation limiting the transfer to only one person, but Paragraph 51(2)(b) does not say "that natural person alone" but "that natural person" and therefore must include the plural unless there is a clear intention to the contrary which there does not appear to be. The fact of the matter is that one, two or more parties can finance all the relevant expenditure when we are talking about possibilities. The test is not the number of people who have donated or done the financing but the fact that he/she or they have donated or done the financing.
The limiting factor that is of significance is the one in Paragraph 51(2)(c), and not whether one or two spouses financed the expenditure. More explicitly the legislation clearly, both in the context of companies (or CCs) and trusts, places a limitation on the natural person and spouse having used the property as their principal place of residence. There is no justification for saying that only one spouse may be a transferee when the property has been the principal place of residence of both and both have either donated the property to the trust or have together financed all the expenditure.
The illogical result of the interpretation placed by the author of the article is that it is in order for a husband and wife married in community of property to take transfer of their principal place of residence from the trust but if they are married out of community of property and have together donated the property to the trust or have together financed the acquisition and improvement of the property neither may take transfer of the property even if it is their principal place of residence.
The interpretation must be wrong and should be revised as soon as possible.
D G Moore
GUTHRIE & RUSHTON
Antoinné van Deventer of Sars responds as follows:
The amendments in the Taxation Laws Amendment Act, 2009 which introduce the concession allowing the tax free transfer of residences out of companies and trusts to individuals are similar to the concessions which were introduced in 2001 when capital gains tax was introduced. The wording and effect of the current amendments is, however, not the same as that of the 2001 Act. The draft documents now prepared are to a large extent based on the CGT Guide which was prepared for the 2001 concessions and is not in accordance with the present amendments. SARS has made suggestions for changes to the documents to bring it in line with the new law.
Discussions have been held with National Treasury as there are anomalies in the paragraph 51 legislation. It was agreed that amendments will be proposed to the paragraph next year to correct the anomalies but until then transactions in respect of acquiring property from a trust will have to be administer according to the current law.
Another question reads as follows:
I paid transfer duty on a transaction that will be registered this week. It was from a CC to a natural person. Does this then mean no transfer duty is payable or that exemption is given to the seller on his capital gains tax?
And the answer is:
You may claim back a refund of the transfer duty which was paid on this transaction if the property was transferred from the CC to the natural person (into his or his spouse's name) and all the requirements as per par 51(1) of Eight Schedule to the Income Tax Act, 1962, have been met. Both transfer duty and CGT will not be liable if the requirements have been met
The third reads as follows:
I would like to know whether you could assist me in regard to the fee on the "Transfer duty Memorandum" referred to in your news letter.
Would you be able to advise on what basis the fee would be charged? Either
- transfer costs when the property was purchased by the Close Corp. or Company;
- on the capital gains valuation;
- present valuation.
To which the answer is:
It will be the base cost due to the fact that the base cost is rolled over from the cc/company/trust to the transferee. In other words, the transferee acquires the property at the base cost for the cc/company/trust. This is just a device to ensure that the transaction does not result in a CGT liability. The gain on the sale of the property is simply postponed until the transferee on-sells it, but then the gain is calculated with reference to the difference between the proceeds in the hands of the transferee-seller and the base cost to the cc/company/trust.