MEMORANDUM WITH REFERENCE TO THE DRAFT GUIDE ISSUED BY SARS ON 22 NOVEMBER 2010
- The South African revenue Service ("SARS") issued a 'Draft Guide to the Disposal of a Residence from a Company or Trust" (the "Guide") on 22 November 2010. The Guide is available on the sars.gov.za website.
- The Guide deals with the window of opportunity covering the period 1 October 2010 to 31 December 2012 for disposing of a residence out of a company or trust into the hands of individuals free of transfer duty, capital gains tax, secondary tax on companies and the yet-to-be-implemented dividends tax.
- It is important to note that the Guide states, in the foreword thereof that-
"The relief measures are applicable to a wide variety of situations and it is not the purpose of this guide to deal with all of them"
and that the Guide
"is not a binding general ruling issued under s 76P of the Income Tax Act 58 of 1962."
- The Guide deals comprehensively with the way in which one should go about making use of the 'the window of opportunity' and goes a long way to making sense of a badly drafted piece of legislation and is a 'must read' for any conveyancer who wishes to effect a transfer from a trust or company (including a close corporation) to a 'person' free of transfer duty, capital gains tax, secondary tax on companies and the yet-to-be-implemented dividends tax.
- I only wish to comment on the question of who qualifies as an acquirer of the relevant residence. Of relevance is Paragraph 51A of the Eighth Schedule and paragraph 7.8 of the Guide.
- Paragraph 51A reads as follows:
"51A. Disposal of residence by company or trust and liquidation, winding up, deregistration or revocation of company or trust.-
(1) Subject to subparagraph (6), this paragraph applies where a company or trust disposes of an interest in a residence and-
(a) the disposal takes place on or before 31 December 2012;
(b) the residence to which that interest relates is mainly used for domestic purposes during the period commencing on 11 February 2009 and ending on the date of the disposal contemplated in item (a) by one or more natural persons who ordinarily resided in that residence during that period;
(c) the natural persons contemplated in item (b) are connected persons in relation to the company or trust;
(d) within a period of six months commencing on the date of the disposal contemplated in item (a)-
(i) in the case of a company making the disposal, that company has taken steps to liquidate, wind up or deregister as contemplated in section 41(4); or
(ii) in the case of a trust making the disposal-
(aa) the founder, the trustees and the beneficiaries of that trust have agreed in writing to the revocation of the trust; or
(bb) application has been made to a competent court for the revocation of the trust.
(2) Where a company or a trust makes a disposal of an interest in a residence as contemplated in subparagraph (1), that company or trust must be deemed to have made that disposal for an amount equal to the base cost of that interest as at the date of that disposal.
(3) Where-
(a) an interest in a residence has been acquired by a person as a result of a disposal by a company of that interest to that person as contemplated in subparagraph (1);
(b) that person (together with all other persons holding shares in that company) acquired all the shares in the company subsequent to the date of acquisition by the company of that interest; and
(c) 90 per cent or more of the market value of the assets held by the company during the period commencing on 11 February 2009 and ending on the date of the disposal contemplated in subparagraph (1)(a) is attributable to that interest,
that person must-
(i) disregard the disposal of all shares held by that person in that company for purposes of determining his or her taxable income, assessed loss, aggregate capital gain or aggregate capital loss if that disposal is made in anticipation of or in the course of the liquidation, winding up or deregistration of that company; and
(ii) be deemed to have acquired that interest at a cost equal to the base cost of the shares contemplated in subitem (1) as at the date of the acquisition by the person of those shares plus the cost of any improvements effected in respect of that interest subsequent to that date of acquisition.
(4) Where an interest in a residence has been acquired by a person as a result of a disposal by a company of that interest to that person as contemplated in subparagraph (1) and where subparagraph (3) does not apply-
(a) that person must disregard the disposal of any share in that company for purposes of determining his or her taxable income, assessed loss, aggregate capital gain or aggregate capital loss if that disposal is made in anticipation of or in the course of the liquidation, winding up or deregistration of that company; and
(b) that person and that company must be deemed to be one and the same person with respect to-
(i) the date of acquisition of that interest by that company;
(ii) the amount and date of incurral by that company of any expenditure in respect of that interest allowable in terms of paragraph 20; and
(iii) any valuation of that interest effected by that trust as contemplated in paragraph 29(4).
(5) Where an interest in a residence has been acquired by a person as a result of a disposal by a trust of that interest to that person as contemplated in subparagraph (1), that person and that trust must for purposes of determining any capital gain or capital loss in respect of the disposal by that person of that interest so acquired be deemed to be one and the same person with respect to-
(a) the date of acquisition of that interest by that trust;
(b) the amount and date of incurral by that trust of any expenditure in respect of that interest allowable in terms of paragraph 20; and
(c) any valuation of that interest effected by that trust as contemplated in paragraph 29(4)
(6) This paragraph does not apply to any disposal made to a person that is a company or trust unless-
(a) within a period of six months commencing on the date of that disposal-
(i) where that person is a company, that company has taken steps to liquidate, wind up or deregister as contemplated in section 41(4); or
(ii) where that person is a trust-
(aa) the founder, the trustees and the beneficiaries of that trust have agreed in writing to the revocation of the trust; or
(bb) application has been made to a competent court for the revocation of the trust; and (b) one or more natural persons contemplated in subparagraph (1)(b) acquire the residence contemplated in that subparagraph on or before 31 December 2012.
(7) For the purposes of this paragraph, ?share' means a share as defined in paragraph 74."
- Paragraph 7.8 of the Guide reads as follows:
"In the case of the multi-tier structure para 51A(6)(b) states that the residence must ultimately be disposed of to one or more natural persons who ordinarily reside in it. Paragraph 51A(1)(c) states that such persons must also be connected persons in relation to the company or trust.
In the case of a company the shares of which are held directly by natural persons, para 51A(3)(a) refers to an interest in a residence being acquired by a person ?
as a result of a disposal by a company of that interest to that person as contemplated in subparagraph (1)?.
Similar wording is employed in para 51A(4) and (5). What is contemplated - the disposal or the person referred to in para 51A(1)(b) and (c)? It would seem that what is contemplated is a disposal of a qualifying residence occurring before 31 December 2012 because para 51A(1) does not contemplate a disposal to a particular person. Paragraph 51A(3)(b) requires that the natural person must at least be a shareholder, but does not say whether he or she must be a connected person who has ordinarily resided in the residence. Paragraph 51A(4) applies when para 51A(3) does not apply. It would seem that this is a reference to the time of acquisition of the shares in the company in relation to when the company acquired the residence, and not literally any other case (for example, in which a person who is not a shareholder acquired the residence).
Paragraph 51A(5) does not provide any information on who can be an acquirer from a trust.
In summary one can only conclude from para 51A(3), (4) and (5) that an acquirer must be a shareholder in the case of a company.
In interpreting para 51A it would not be unreasonable to assume that the legislature would be consistent in its approach to who can be an acquirer. It is inconceivable that the legislature would specify who must occupy the residence (one or more natural persons who ordinarily reside in it and are connected persons in relation to the company or trust) without requiring that the residence should be disposed of to those persons. The opening words of para 51A(1) commence with the words ?subject to subparagraph (6)?. Although para 51A(6) specifically deals with the multi-tier structure it must be assumed on a purposive construction that it was intended to identify the ultimate acquirer of a residence in all circumstances.
In conclusion it is submitted that the ultimate qualifying acquirer of a residence is one or more 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 or trust during that period. The implication is that a disposal of a residence to any other person will not qualify for the relief.
A deceased estate cannot be an acquirer because it is not a natural person. If a natural person acquires a residence under an unconditional agreement but dies before the residence can be registered in his or her name, the relief will still apply, since the residence was disposed of to a natural person at the time of disposal determined under para 13"
- The conclusion to which the author(s) of the Guide came was probably the intention of the legislator. The clear wording does not, however, allow for such interpretation. The clear wording, which could lead to many unintended consequences, provides that:
(a) should the disposal be to a company or trust, Paragraph 51A shall not apply unless inter alia, the relevant residence is disposed of to one or more of the natural persons who used the dwelling mainly for domestic purposes and ordinarily resided in that residence during the period commencing on 11 February 2009 and ending on the date of the disposal (note that Paragraph 51(6) does not refer back to Paragraph 51A(1)(c) and accordingly the acquirer(s) of the residence need not be connected person(s) in relation to the company or trust) but;
(b) should the disposal be to any person who is not a company or trust Paragraph 51A(2) shall apply as long as one or more connected persons in relation to the disposer used the dwelling mainly for domestic purposes and ordinarily resided in that residence during the period commencing on 11 February 2009 and ending on the date of the disposal and the other requirements contained in Paragraph 51A (a) and (d) are complied with.
- I would appreciate the comments of other conveyancers regarding the interpretation of Paragraph 51A of the Eighth Schedule with special reference to who may be the acquirer(s) of the residence.
Roelie Rossouw
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