TRANSFERRING A RESIDENCE FROM A COMPANY OR TRUST TO A NATURAL PERSON: EXEMPTION IN TERMS OF SECTION 9(20) OF THE TRANSFER DUTY ACT, 1949
The Eighth Schedule to the Income Tax Act, No 58 of 1962 provides that only natural persons (individuals) are entitled to exclude from their taxable capital gains the first R 1,5 million on disposal of their primary residences. This exclusion therefore does not apply where a company, close corporation or trust owns the residence. Additionally, many individuals have historically purchased their residences in companies or trusts for a variety of reasons, including protection from creditors, avoidance of transfer duty and estate duty and circumvention of the repealed Group Areas Act. These persons now face a potential Capital Gains Tax ("CGT") liability when "their" company, close corporation or trust disposes of the residence.
Following representations, legislation was introduced for the second time by the Taxation Laws Amendment Act of 2009 to allow individuals yet another window of opportunity to transfer their residences out of their companies or trusts into their own names without incurring any adverse tax consequences. Set out below are the conditions that must be satisfied to secure a duty-exempt transfer, and information regarding the person(s) into whose name the primary residence may be transferred.
This opportunity is, as before, only available for a limited period. The transfer must take place on or after 11 February 2009, but not later than 31 December 2011.
2. The law
Note: References to a "company" also include references to a close corporation.
2.1 The following provisions offer exemptions from:
- Transfer Duty on the acquisition of the residence which constitutes the acquirer's primary residence - section 9(20) of the Transfer Duty Act, No 40 of 1949;
- Secondary tax on companies in respect of any dividend arising in consequence of the transfer - section 64B(5)(k) of the Income Tax Act, No 58 of 1962 ("the Act");
- Capital gains tax on any gains realised by the company or trust as a result of the disposal - paragraph 51 of the Eighth Schedule.
2.2 Primary residence definition
- The term "primary residence" is defined in paragraph 44 of the Eighth Schedule as follows:
"a residence -
(a) in which a natural person or a special trust holds an interest; and
(b) which that person or a beneficiary of that trust or spouse of that person or a beneficiary -
(i) ordinarily resided or resided in as his or her main residence; and
(ii) uses or used mainly for domestic purposes;"
2.3 Donations Tax
This dispensation does not provide for specific exemptions from donations tax. In terms of section 58 of the Act the disposal of property for a consideration (value) less that its fair market value is deemed to be a donation.
The section however provides that the Commissioner must determine that the consideration is inadequate. The Commissioner will not seek to adjust the consideration if:
(a) the transfer is exempt in terms of section 9(20) of the Transfer Duty Act, and
(b) the transaction is not entered into for the purposes of tax avoidance.
3. Conditions that must be satisfied to secure a duty-exempt transfer
3.1 The natural person requirement
An individual or individuals (in other words natural persons) must acquire the residence.
3.2 The primary residence requirement
Both before and after acquisition, the residence must constitute the acquirer or acquirers' "primary residence" as defined above.
3.3 The residence and use requirement
(Paragraph 51(2) of the Eighth Schedule to the Act)
The person or persons to whom the residence is to be transferred must have -
- ordinarily resided in the residence; and
- used it mainly for domestic purposes as his/her or their ordinary residence
as from 11 February 2009 to date of transfer. Paragraph 51(2)(c) requires both personal and ordinary residence. Constant physical presence is however not required. In practical terms, all that is required is that the transaction should concern the family home or the home of the individual, as the case may be. Holiday homes are not included. The ordinary residence requirement does not require that after transfer the ordinary residence must continue. In other words, steps to alienate the property subsequent to transfer are not by themselves distractive of the taxpayer's evidence that he or she or they are ordinarily resident in the property and will be so resident until the date of transfer.
3.4 Acquisition of the property from a company or trust
The acquisition must take place between 11 February 2009 and 31 December 2011.
No disposal by a company or trust to any individual prior to 11 February 2009 or after 31 December 2011 qualifies for the exemption.
3.5 Acquisition from a company: 100 % direct shareholding
Either the individual alone or the individual together with his or her spouse must have directly held all the share capital of the company or member's interest in the close corporation, as from 11 February 2009 to the date of registration of the property in the deeds registry.
"All" means 100 % of the share capital - if, for example, a minor child holds 1 % of the share capital, the exemption does not apply.
"Directly" means the shares or interest of the company must be registered in the name(s) of the individuals concerned and be held for their own benefit.
The concession therefore does not apply where -
- The residence is held by a subsidiary company;
- The shares in the company holding the residence are owned by a trust; or
- The shares are held by more than one person and those persons are not spouses. "Spouse" is defined widely in our tax legislation. If, therefore, one of the shareholders is a child of the spouses, the exemption does not apply.
3.6 Acquisition of property from a trust: Donation or financing requirement
The requirements in this regard are -
- The trust must have acquired the property from the individual taking transfer of a property by way of donation, settlement or other disposition; or
- The individual receiving transfer of a property must have provided the monies to finance all the expenditure incurred by the trust in acquiring and maintaining the property.
The above requirement has been met where a bond was utilised by a trust to acquire a property in the name of a trust and the individual seeking the exemption has financed the instalments in full.
The exemption does not apply in the following circumstances:
- The individual taking transfer of a property only partly financed the expenditure incurred by the trust when it acquired or improved the property, for example, someone else paid for the addition of a room, etc. This requirement even applies as between spouses. Two parties cannot each finance all relevant expenditure. However, spouses married in community of property acquire the transfer of immovable property in both their names by virtue of section 17(1) of the Deeds Registries Act, No 47 of 1937. The relief is therefore available to them both even if one of them financed the expenditure.
3.7Last date for registration in the deeds registry
The last day for registration in the deeds registry of the residence in the name of the person receiving transfer is 31 December 2011. Paragraph 51(2)(d) of the Eighth Schedule however limits this rule to item (b)(i) of that sub-paragraph only. In other words, only registrations of transfer from a company must be completed by that date. Transfers from trusts may take longer than that (para 51(2)(a)). This will become an issue during late 2011 only. By then it is probable that a correcting amendment would have been promulgated, applying the final date to both types of transaction.
3.8 Land together with a primary residence
(Proviso to paragraph 51 read with paragraph 46 of the Eighth Schedule)
The exemption applies in respect of the primary residence and the land on which it is situated, including unconsolidated adjacent land. The total portion of the land may however not exceed two hectares. The land on which the residence is situated as well as any unconsolidated adjacent land must also be used mainly for domestic or private purposes. Any land transferred must be disposed of at the same time and to the same person as the residence.
The portion of the land beyond two hectares will not qualify for any exemptions and will therefore be subject to transfer duty and CGT. The transfer duty will be calculated at the rated and value applicable on the date of acquisition. The gain or loss for CGT purposes must also be determined on the date of acquisition, having regard to any increase or decline in value of the land exceeding two hectares from 1 October 2001 to the date of disposal by the company or trust.
4. Into whose name may the primary residence be transferred?
4.1 From company
The residence which is held by a company can be transferred even into the name of a spouse who holds no shares. For example, if the husband holds all the shares and the primary residence is transferred into his wife's name, the exemption applies. If each spouse holds a percentage of the shares (quantity irrelevant) of which the sum constitutes a 100 % shareholding, the transfer of the residence to the name of either of the spouses or into their names jointly will qualify for the exemption. The presence of a third shareholder renders the concession inapplicable.
- Assuming two spouses, A and B who are married out of community of property, the table below shows into whose names the residence may be transferred.
Shareholders Residence may be transferred into the name of A owns 100% A, B, or A and B jointly A and B jointly own 100% A, B, or A and B jointly
- Assuming two spouses, A and B who are married in community of property, the table below shows into whose names the residence may be transferred.
Shareholders Residence may be transferred into the name of A owns 100% A and B jointly A and B jointly own 100% A and B jointly
The Eighth Schedule does not require that the natural person alone or together with that person's spouse must have disposed of the residence to the trust by way of donation, settlement or other disposition or financed all the expenditure. It refers only to that natural person. If the residence is registered jointly in the spouses' names because they are married in community of property, the exemption applies. Not so if they are married out of community of property. Nor does it apply if the residence is registered solely in the spouse's name who did not finance the expenditure. It must be registered in the name of the person who made the donation, settlement or other disposition, or financed all the expenditure, or in the name of that person together with that person's spouse to whom he or she is married in community of property, in order to qualify for the transfer duty exemption.
- Assuming two spouses, A and B who are married in / out of community of property, the table below shows into whose names the residence may be transferred.
|Spouse who donated the residence or financed all the expenditure||Residence may be transferred into the name of|
|A only||A and B jointly (married in community of property)
A only (married out of community of property)
|A and B jointly||A and B joinlty (the exemption does not apply unless they are married in community of property)|
For: COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE
Date: 10 December 2009