The Taxation Laws Amendment Bill 2010 (as drafted at 24 August 2010) has been tabled in Parliament and was assented to on 31 October 2010. It contains significant changes which will impact on all disposals of property in terms of the Eighth Schedule to Act 58 of 1962 (the Income Tax Act), after 1 October 2010.
The existing Paragraph 51 remains in place and now governs disposals in terms of that provision signed before 30 September 2010.
As from 1 October 2010 Paragraph 51 A has now come into effect. The main points are:
- the "disposal" must take place between 1 October 2010 and 31 December 2012. Reference to date of transfer (as appears in the existing Para 51) has been omitted - only the disposal must take place by 31 December 2012. "Disposal" is defined in Para 13 of the 8th Schedule of the Income Tax Act as "in the case of an agreement subject to a suspensive condition, the date upon which the condition is fulfilled; or alternatively" in the case of "any agreement which is not subject to a suspensive condition, the date on which the agreement is concluded";
- the property may be "disposed" of to
i) 'natural persons' who are 'connected persons' as defined in the Income Tax Act;
ii) who have ordinarily resided in the residence;
iii) which residence has been "mainly used for domestic purposes since 11 February 2009 until date of disposal".
This is the major change from the existing Para 51 since, under that legislation, the property could only be "disposed of" to a natural person and/or spouse who either held all the shares / members interest in a CC or Company or financed all the expenditure for a Trust to acquire the property or settled the property on the Trust.
The explanatory memorandum on the SARS website refers to the amendments reflected in Para 51A as providing 'a more flexible regime' to be "further widened to allow for a more complete array of distributions. Firstly, the distribution rules will no longer be restricted to the originating funders (and their spouses). Qualifying distributions can be made to a broader set of shareholders or beneficiaries. Secondly, the revised relief will accommodate multi-tier structures."
This memorandum clearly suggests that estate planning structures, for example, where persons have acquired residential properties in companies or close corporations with shareholding / membership interest held by Trusts, will have the opportunity of using Para 51A to unbundle the structure and take transfer of the property. It is a requirement, however, that 'steps must be taken' by the entity which held the property to deregister (in the case of Companies and Close Corporations) / or to be revoked (in the case of Trusts) within 6 months of date of disposal. Section (1)(d) of Para 51A refers.
There are further benefits which appear to be available due to the use of 'connected person' as a potential transferee of a residential property.
The definition of 'connected person' in the Income Tax Act refers to
1) in relation to a natural person
- any relative; and
- any trust of which such natural person is a beneficiary
2) in relation to a Trust
- any beneficiary of such trust; and
- any connected person in relation to such beneficiary
3) in relation to a Company
- 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;
- where there is a Close Corporation
- any member
any relative of such member or any trust which is a connected person in relation to such member
On the basis of the above, the undermentioned scenarios are considered.
- Residence - Company owned - shareholders A, B and C where A and B are husband and wife and C is their child.:-
Assuming A, B and C were all residing in the property as at 11 February
2009 and that it was used for 'mainly domestic purposes' then it will be
possible to transfer to all three shareholders provided that they each hold
more than 20% of the shares. Until we receive a SARS Practice Note, it is unclear whether it will be necessary to transfer shares in the property according to the respective shareholding or whether it will be possible to transfer into the name or names of only some of the shareholders. The Act does however suggest the property can be acquired by "one or more natural persons " who ordinarily resided in the property - (1)(b) of Para 51 A - which suggests that it will be possible to select one or more of them to take transfer.
- Residence - CC owned - membership interest held by a Family Trust - beneficiaries of Family Trust are A, B and C (as above) who also reside on the property. A, B and C as beneficiaries of the Trust are clearly 'connected persons' to the Trust, the Trust in turn, appears to be a 'connected person' as regards the CC (as 100% membership holder) and this creates the continuity to allow disposal and transfer of the property to A, B and C. In the absence of any distribution conditions in the Trust Deed it would be assumed that the beneficiaries could take transfer of the property in equal shares but note my comments in i) above.
- It appears that where a residence is Company owned and the shares held by a Family Trust as set out in ii) above - possibly the most common estate planning structure - the exemption will also apply if the Trust is deemed by SARS to be a "connected person" to the company. This would appear to be the case if a Trust is regarded as a "person" as referred to in (d)(iv) of the definition of "connected person".
It has been suggested by commentators that this dispensation will also apply to holiday/second homes but the "ordinarily residing" requirement suggests that SARS will only consider applications which refer to properties which constitute a primary residence.
It is clear from the provisions of the new Para 51A that the property holding company or Corporation or Trust must be deregistered / revoked following transfer to a qualifying natural person -Section (1)(d) of the Para 51 A refers.
The further inclusion of Section (6) of Para 51 A implies that where there is a multi tiered structure as contemplated in ii) and iii) above that there firstly must be a "disposal" of the property to the entity holding the shares and then a further "disposal" before 31 December 2012 to one or more of the natural persons who qualify in terms of Section (1) (b). The entity holding the shares must also then "take steps" to be deregistered or revoked within the 6 month time period. If there are two "disposals" contemplated by SARS can it assumed that there will have to be two different conveyancing transactions? It is submitted that Section 14 of the Deeds Registries Act must be followed and transfers of property must follow the sequence of the successive disposals.
In summary, unless further legislation or Practice Notes emerge, where there is a multi tiered structure, all entities will, in my view, be required to deregister / be revoked and there will be two separate disposals and therefore two conveyancing transactions in order to effect transfer of the property to the designated natural persons.
Smith Tabata Buchanan Boyes
4 November 2010
Readers' opinion hereon will be appreciated Editor GhostDigest