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The Taxation Law Amendment Act was promulgated on 30th September 2009 and will take effect as from the 1st of January 2010. The Act amends paragraph 51 of the 8th Schedule, which previously provided for the 2002 transfer exemption from Transfer Duty and Capital Gains. The legislation now proposed effectively repeats what was previously provided for, except with new dates.
In the result, a window period of 2 years ending on 31st December 2011, is provided for in terms of which a natural person is entitled to take transfer of a residence from a Company, Close Corporation or Trust, provided that he or his spouse personally and ordinarily resided in that residence and used it mainly for domestic purposes as his or her ordinary residence from not later than 11th February 2009, up until the date of registration of transfer.
Insofar as transfer from a Company is concerned, the requirement is that the natural person or his spouse directly held the Share Capital or Members Interest in that Company from 11th February 2009 to date of registration. For a Trust, that natural person must have disposed of the residence to the Trust by way of a donation or other disposition or financed all the expenditure relating to the acquisition and improvement of the residence.
The Transfer Duty Act has been amended to provide that if a transfer takes place in terms of para 51, then no Transfer Duty will be payable. The CGT position is that the natural person, in effect, takes over the base cost of the Company or Trust as if it were that Company or Trust.
Various queries arise from this. The recommendation was made that this exemption should be extended to where Shares or a Members Interest were held in a Trust, rather than by a natural person, so as to simplify unnecessary structures and clean out the stables once and for all, so to speak. National Treasury declined to extend the exemption on the basis that the previous 2002 provisions did not allow this type of relief and therefore should not now be extended to persons who failed to take advantage of the opportunity the first time. I do not agree with this approach. Rather if one seeks to simplify tax and its consequences, do so on a thorough basis. I have come across situations where an offshore Trust hold Shares in an offshore Company, which in turn holds Shares in a local Company, which in turn own a residence occupied by Beneficiary of the offshore Trust. Again, an unnecessarily complicated structure, which cries out for demolition!
Another interesting aspect to these transactions is as to whether the Company and/or Trust can or should dispose of the residence by way of a sale i.e. on an arms-length basis. Would it otherwise constitute a donation? The effect might well be if, for instance, the sale was by way of the creation of a Loan Account in the Company or Trusts hands on the sale of the residence, a scheme whereby that natural persons estate is reduced by the debt for Estate Duty purposes. If, on the other hand, the Company were to distribute the residence as a dividend in specie, would that attract STC/Dividend Tax of 10%? Initially, I thought that no exemption provision had been catered for, but on further investigation, I noted that the provisions of Section 64B(5) had been amended by the addition of a sub-paragraph (R) exempting dividends from STC which constitute a transfer of an interest in a residence contemplated in paragraph 51
In other words, not only had SARS thought of it all, but are probably of the view that a distribution in specie from a Company or a distribution from a Trust, is the correct way to go about it!
If a distribution of the residence were made by a Trust, it would not constitute a donation because of the exemption provisions contained in Section 56 of the Income Tax Act exempting distributions by Trusts from Donations Tax. In the result, most transfers will probably take place by way of a dividend in specie, or a distribution by a Trust, but consideration should be given to the Estate Duty advantage of creating a Loan Account in the hands of a Trust. If a loan is advanced by the Company on the sale of a residence to a Shareholder, then in terms of Section 64C, subject to certain qualifications, it will constitute a dividend and in terms of the new Value Extraction Transaction (VET) provisions, Dividend Tax of 10% will be payable by the Company immediately on such a distribution. The VET provisions will take effect on a date to be promulgated by the Minister of Finance when the Dividend Tax system will change as well. The complexities of tax continueth!
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