CGT BEGINNING TO BITEAs the property market continues its upward trend more and more people are affected by Capital Gains Tax (CGT) and also a variety of complex legislation affecting the transfer procedure. CGT is beginning to bite albeit when first introduced it was shrugged off by many on the basis that at worst it was only a charge of 10% on the gain. However, with property appreciating in the region of 35% a year since the 1st of October 2001 the money involved is not small change anymore and where a deceased Estate is involved results in taxes and duties of up to 28% where they may be no ready cash available. I continually emphasise the advantages of Trusts to avoid exactly these taxes. My perception is that the average person does not appreciate how simple the setting up and operation of a Trust is or possibly that as he/she will be dead at the time, it doesn’t really matter!
APPLICABLE LEGISLATION
SARS has been accused of slowing up transfers on the basis that transfer duty receipts will not be issued until SARS is satisfied that both the Purchaser and Seller are up to date in submitting returns and paying outstanding taxes. The Income Tax Act provides under Section 99 for the Commissioner to be able to “declare any person to be the agent of any other person…….. and be required to make payment of any tax, interest or penalty due from any monies ……. which may be held by him or due by him to the person whose agent he has been declared to be……”. The same provisions are set out in Section 13B of the Transfer Duty Act. It is only recently that SARS has adopted the practise of using this Section at the same time as transfer duty receipts are issued to ensure compliance with any outstanding tax issues. In my view while SARS is entitled to obtain payment via such appointment they are not entitled to hold up the transfer otherwise and transfer duty receipts should not be delayed as such.
1. CGT AND NON-RESIDENTS1.1 A recent amendment to the Income Tax Act, Section 35A, provides for the Purchaser/conveyancer holding back a portion of the purchase price from the non-resident Seller of immovable property as a CGT pre-payment. In terms of section 35A(1) the buyer/convenyancer must withhold the percentages from the purchase price: 5% (where the seller is an individual), 7,5% (where the seller is a company) and 10% (where the seller is a trust). In terms of section 35A(2) the seller is entitled under certain circumstances to apply for a reduced amount to be withheld (that is, a tax directive). This could apply, for example, where the non-resident can show that the residence was his or her primary residence and the capital gain was less than R1 million. The withholding requirement does not apply to properties sold for R2 million or less. The Section will only come into effect on a date to be proclaimed by the President which has not happened to date. Nor is anticipated to take effect until late next year! 1.2 I have had considerable discussions with SARS in regard to the entitlement of a non-resident to obtain the Primary Residence deduction of R1 million on the basis that it is his only residence in South Africa and even if he only resides in the residence for a few days in the year. How one can be a non-resident without a primary residence outside SA is difficult to envisage! SARS does not agree with my view.
1.3 A Primary Residence is defined as being a residence “in which a natural person ….. ordinarily resides or resided in as his or her main residence and uses or used [it] mainly for domestic purposes …..”. The words “ordinarily resides” or “resided in” are not defined in the Act but a long list of Income Tax cases has defined what is meant by this term albeit more for the purposes of determining the source country of income rather than whether a person actually resides in a residence or not.
1.4 Clearly what is intended for the purposes of CGT is to know not whether the person in question has chosen South Africa as his/her place of residence but whether the house is the one which she/he uses as his/her main or principal place of residence. Perhaps the definition given in the case of Thompson vs Minister of National Revenue TDC812(SCC) gives the best definition where it was stated that it is the place “where in the settled routine of his life he regularly, normally and customarily lives . . . or at which he in mind and in fact settles into or maintains or centralises his ordinary mode of living with its accessories in such relations, interest and conveniences”. Certainly this is what happens when a non-resident stays in his/her only house in South Africa. 2. SAR'S VIEWPOINT SARS’s attitude is set out in a draft Comprehensive CGT Guide which states as follows, namely “11.2.4.2 No primary residence offshore
Where a non-resident does not own a primary residence elsewhere and buys one for the purpose of residing therein during an extended visit to South Africa, the South African residence may comprise a primary residence. This is so notwithstanding that the person is not ordinarily resident in this country. The residence in South Africa would be the one where the person ‘ordinarily resides’ while in South Africa and would comprise his or her ‘main residence’ whilst in South Africa.
11.2.4.3 More than one primary residence
Where the non-resident owns a primary residence in his or her home country, the South African home will not comprise a primary residence, as it would not be one where the person ‘ordinarily resides’ as his or her ‘main’ residence. A determination has to be made as to where a person ordinarily resides. This cannot be determined over a short period of a year unless there is clear evidence that the person has decided to permanently move his or her place of ordinary residence. The temporary letting of the overseas residence will not render the South African residence a primary residence, since the person does not ordinarily reside in the South African residence as his or her main residence. The letting of a residence could be an indicator of a change of primary residence but it is by no means a decisive factor.”
I do not agree with these propositions. Whether or not a non-resident owns a residence elsewhere is completely irrelevant for the purposes of the Act because the Act does not apply outside South Africa insofar as non-residents are concerned. Thus, provided he/she has no other “primary residence in the Republic” the test in my view is satisfied. 3. WHAT’S BEST EAST OR WESTThere is much talk about whether it is better to rent or buy. This is likewise referred to in a recent article of “The Economist” where in terms of a worldwide survey it was established that potential first time homeowners were renting rather than purchasing because of the cash flow consequences notwithstanding an ultimate appreciation in the property price. I have done my own calculations and if one takes say a one bedroom loft house style flat in Cape Town as selling for R1,2 million which would equate to a rental of say R12 000,00 per month on the basis of a 10% return without taking into account payment of rates but where the going rental is closer to R4 000,00 it would appear that renting is obviously the winner. However, taking an interest rate of 9.5% and an annual appreciation of 10% together with the costs of purchase and resale, after approximately three years the return by way of investing outweighs the rental situation. If the figure of 10% appreciation on the value of the property is doubled to 20% the tipping point is more or less a year after purchase! It was interesting working with these figures because they set out in graphic detail the principles involved namely that the payment of rental is “dead money” that the appreciation on property takes place against the whole value, i.e. including the bonded value. In contrast investing the difference between the rental and what would have been paid as a bond payment only accumulates month by month from a small beginning; i.e. in the first month one would be able to invest say R6 000,00 being the difference between a bond repayment of R10 000,00 and a rental of R4 000,00 but the capital appreciation on the value of the property is on the full R1,2 million! If in fact one pays no rental the purchase on the facts above set out (ie investing R10 000,00 per month) at an appreciation rate of 20%, a sale of the property after 16 months if purchased would result in a neutral cash position! The calculations are on my website and can be manipulated to see the various scenarios.
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