Antoinné van Deventer - Law Interpreter: Taxpayer Service responds to the following two questions.
I am a conveyancing attorney practising in the greater Johannesburg area and have been requested by one of the largest real estate agencies in South Africa to obtain clarity from SARS as regards the interpretation of the substituted para 51 of the Eighth Schedule to the Income Tax Act. I believe that the interpretation sought will be of great value to all attorneys mandated to render advice on and implement the provisions of para 51.
The questions are not posed on behalf of the Law Society or the legal fraternity but should you require I shall endeavour to obtain their support in seeking your much appreciated input.
The question/s centre around the interpretation of para 51 (2) c which I have cited for ease of reference.
(c) that natural person alone or together with his or her spouse personally and ordinarily resided in that residence and used it mainly for domestic purposes as his or her or their ordinary residence from 11 February 2009 to the date of registration contemplated in item (b) (i);
As para 51 (2) c embraces more than one requirement, I have for easier reference taken the liberty of dividing it into sub-paragraphs as follows:
(c) that natural person alone or together with his or her spouse:
(i) personally and ordinarily resided in that residence; and
(ii) used it mainly for domestic purposes as his or her or their ordinary residence,
from 11 February 2009 to the date of registration contemplated in item (b) (i);
1. Does para 51 (in particular para 51 (2) c)) whether expressly or by implication deny a natural person the relief envisaged therein if that natural person sells the residence at any time prior to the residence being registered in the natural person's name? Rephrased, will a natural person be entitled to avail himself of the relief contained in para 51 if he/she sells the residence before it is registered in his/her name at the Deeds Office?
2. If a sale before transfer is indeed prohibited by para 51, would a sale prior to transfer but subject to the suspensive condition that the residence is transferred from the company or trust to the natural person (ie the seller) in accordance with para 51 alter the position? In this regard, the provisions of para 13 (1) (a) (i) (time of disposal) may be of relevance.
3. Assuming that that a sale (whether with or without a suspensive condition) prior to transfer is not prohibited by para 51, will a simultaneous transfer of the residence from the company or trust to the natural person and from the natural person to the purchaser result in para 51 not being complied with?
My concern is that members of the public who qualify for the relief provided for in para 51 and who intend to sell their residences in the near future might wait (or be advised to wait) to enter into an agreement with a willing and able purchaser before registering the residence in his or her name. Their motive might be to avoid the cost of re-registering a mortgage bond/s currently registered in favour of a financial institution (assuming that the natural person is not in a position to settle the outstanding balance of the mortgage loan) and/or to avoid the process of re-applying for the loan secured by the bond under the provisions of the National Credit Act. It is quite possible that the natural person may no longer qualify for the outstanding balance under the bond and as such would not be able to take transfer without settling such outstanding amount.
The natural person might not be able to afford the legal costs associated with transfer nor the amount required by the relevant local authority to obtain a rates clearance certificate to enable transfer (usually up to six months in advance). The proceeds from the sale and simultaneous transfer (if permissible) could be used to fund these costs and expenses.
I believe that many attorneys will be consulted to implement para 51 simultaneous with a sale or anticipated sale of the residence to a purchaser. If, after transfer of the residence to the shareholder and either simultaneous transfer to the purchaser or a transfer shortly thereafter, SARS adopts the view that para 51 has not been complied with, the natural person will in addition to the CGT and STC (if a company or close corporation) be liable for the transfer duty in connection with the transfer from the company or trust to the natural person.
This position could have been avoided if (to the extent necessary depending on SARS interpretation of para 51) either the natural person waited until transfer before selling the property or if, in an attempt to hold on to the purchaser, elected to disregard the provisions of para 51 and sell and transfer directly to the purchaser.
Again, I believe SARS' view on this matter will be of great benefit to both members of the legal fraternity and unsuspecting clients seeking their guidance.
I understand that SARS is currently formulating a policy document regarding the interpretation of section 9 (20) of the Transfer Duty Act read with para 51 of the Eighth Schedule to the Income Tax Act for distribution to attorneys. Should SARS deem it appropriate, its views on the questions raised above could be incorporated in such document.
Antoinné van Deventer replies as follows:
Dear Mr X
Transfers in the Deeds Office must follow the sequence of their relative causes/transactions and therefore, the transfer from the company to the shareholder must be completely finalized before the shareholder can sell the property to a third party purchaser. Note however the difference between the sale and the transfer. It is possible to sell the same property simultaneously on the same day to two purchasers, as long as they take transfer successively.
The "ordinary residence" requirement must obviously also be complied with. It would therefore be helpful if you would bring to your client's attention the need to bear the facts of each case in mind. SARS cannot therefore express a view that takes no account of the facts of each case. The best that can be done is to advise that more than one transaction in relation to the same property will not automatically disqualify the transferee without consideration of the "ordinary residence" requirement. The issue, therefore, is not related to an interpretation of para 51(2)(c) at all. It concerns, rather, the "ordinary residence" requirement, which is not unique to this provision only. That requirement raises factual questions and the truthfulness of evidence on oath supplied to SARS by taxpayers via the intervention of the legal and estate agent professions.
I refer to the following paragraph that appeared in the Ghost Digest of 17 December 2009:
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
1. transfer costs when the property was purchased by the Close Corp. or Company;
2. on the capital gains valuation;
3. 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.
I am not sure where this answer came from but it is not correct although it is also not legally wrong.
The answer is to be found in paragraph 2(b) (iv) of the general note at the beginning of the "RECOMMENDED GUIDELINES OF FEES" distributed by the Law Society which makes it clear that the value on which fees should be based is a current "official valuation" which may be the municipal valuation, or if there is none then the fair value as defined in the Transfer Duty Act. The historic base cost is not such a valuation although it may still be relevant with regard to properties acquired recently before 11 February 2009.
And the response reads as follows:
Although we expressed the opinion that the base cost should be reflected as the transaction value, we were perhaps too alive to the purpose of the exemption.
Fair value at the date of acquisition would be strictly speaking correct, because that is the value upon which duty is leviable.
You would no doubt appreciate that if we stipulate "fair value" in respect of these transactions, the next question would be whether or not it needs to be supported by a valuation.
Although we are on reflection inclined to agree with you, it might at this stage be an unnecessarily academic exercise to require "fair value" if no duty will be payable.