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Income Tax Act amendment regarding roll-over of capital gains tax

12 Apr 2012

Sonja FrankParagraph 51A of the Eighth Schedule of the Income Tax Act, introduced in 2010, pertains to companies and trusts being used to purchase residences to avoid the imposition of transfer duty.

The Paragraph deals with the situation where a company or trust who owns a residence that is used mainly for domestic purposes, wishes to transfer it to one of its connected persons before taking steps to terminate that company or trust.

Prior to the deadline of 31 December 2012, such residence can be disposed of to certain persons without it being subject to capital gains tax. The implication is the following: after the residence has been transferred to a natural person, the trust or company is terminated and the potential capital gains tax is rolled over to the time when it is disposed of by that natural person. In the following discussion, we’ll deal with only trusts for the sake of convenience.

The recent amendment to Paragraph 51A has made it clear that this relief is not limited to primary residences. The previous requirement – that a person should have “ordinarily resided in that residence during that period” – has been replaced with the requirement that a residence must be disposed of to a connected person of the trust. Holiday homes are therefore now also covered by this paragraph.

To qualify for this relief, the residence should have been used mainly for domestic purposes since 11 February 2009. Furthermore, the residence must be disposed of to a connected person of the relevant trust, i.e. one of the trust’s beneficiaries. After such disposal, steps should be taken to terminate that trust.

Although it seems an attractive option, one must first determine whether it will indeed be advantageous to remove a residence from a trust. A deemed disposal of all assets in a person’s name takes place on the date of that individual’s death. If it includes a primary residence (as defined in the Income Tax Act), the natural person who is the recipient of that residence and who uses it as his/her primary residence, will be able to disregard the first R2 million (as from the 2013 financial year) capital gain. In cases where this advantage can be utilised, it might be advisable to remove the residence from the trust as per Paragraph 51A.

In the case of a holiday home, no such relief will be granted and the individual’s estate will be liable for capital gains tax. This liability would not have occurred had the residence remained in the trust. Whether it is worth the tax liability and administrative costs, is an open question.

Another aspect to consider is the termination of the trust in terms of Paragraph 51A before the roll-over of capital gains tax can take place. This means that all other assets of the trust have to be sold, whereupon capital gains tax will be payable, if applicable.

Transferring residences from trusts before the December deadline therefore requires careful consideration. The effect of capital gains tax should the residence form part of a natural person’s estate, should be weighed up against the advantages before taking such decisions.

For more information, contact Sonja Frank of Exceed Trust on tel. 021 882 8140 or e-mail sonja@exceed.co.za

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