After representations were made to the National Treasury with respect to the introduction of a residential property amnesty, it appears that the final version of the legislation has been 'renovated' to suit the array of family planning structures and circumstances currently being utilised. Certain problems do, however, remain unresolved.
2009 saw the introduction of a 'residential property amnesty' which allowed for tax-free transfers of residential properties from companies or trusts, to natural persons during a specified window period of 11 February 2009 to 31 December 2011 where certain requirements were met. Following the enactment of this legislation, proposals were made for it to be amended so as to rectify many of the practical difficulties of qualifying under those requirements. The Taxation Laws Amendment Bill, 28 of 2010,(TLAB) now amends the legislation as applicable to disposals effected on or after 1 October 2010. Transfers or disposals that have taken place prior to 30 September 2010 will continue to be dealt with under the current legislation.
The amended version of the amnesty allows for greater flexibility to terminating residential entities. Most notable of the changes to the final legislation is that the amnesty will now apply to all liquidating transfers of residential properties used by and ultimately transferred to family members. It will also now apply to transfers between entities, e.g. where a trust holds a company that holds the property, the beneficiary of the trust will be entitled to acquire the house using the amnesty, provided that all entities involved in the transaction liquidate or wind up within 6 months subsequent to the transfer.
The qualifying criteria for companies and trusts pertain to the use of the property prior to disposal and the subsequent termination of the entity involved. Firstly, the legislation requires that the primary residence being disposed of should have been used by natural persons, being the individual shareholders of the company or their relatives, or by relatives connected to the Trust, as the case may be, during the window period of 11 February 2009 to the date of disposal being on or before 31 December 2012. Such natural persons must have ordinarily resided in the residence and used it mainly for domestic purposes during the window period concerned. Secondly, the company or trust must dispose of the residence in anticipation of, or in the course of, the company's liquidation, winding up or deregistration, or the trust's termination. The company or trust must have taken steps to terminate within six months of the disposal of the residential property.
Nature of relief provided
Where a company or trust disposes of an interest in a residence to a person, during the window period of 1 October 2010 to 31 December 2012, as contemplated above, the nature of the relief offered by the proposed new paragraph 51A of the Eighth Schedule to the Income Tax Act, Act 58 of 1962 ("the Act") includes:
- A 'rollover' of the domestic residence to the person at the base cost of the residence. The effect of the rollover relief is to have all capital gains tax implications postponed until the residence is subsequently disposed of by that person.
- For the purpose of determining capital gains or capital losses in respect of the disposal of a domestic residence to a person, the company or trust, and the person, must be deemed to be one and the same person for the purposes of establishing the date of acquisition and the expenses incurred in respect of the domestic residence as well as for the purpose of utilising any valuation of the domestic residence effected by the company or the trust.
Determining the base cost of a residence in the hands of the recipients depends on whether the disposal was one made to the company's original shareholders or to shareholders who acquired an interest in the company subsequent to the company having acquired the residence. Where a disposal is made to the company's original shareholders, as mentioned above, the base cost remains the same as that held by the company and includes all expenses incurred in respect of the residence. The recipient may also utilise any valuation of the residence effected by the company. Where, however, the disposal is made to non-original shareholders, and the value of the residence constituted 90% or more of the value of the value of the company during the window period, the base cost is adjusted. The base cost of the residence is kept in line with the current shareholder's cost of acquiring the shares, which cost is then adjusted for subsequent improvements to the property.
The transfer of a primary residence by a company or trust during the window period will be exempt from transfer duty. The exemption from transfer duty is effected by the amendment in the TLAB of section 9 of the Transfer Duty Act 40 of 1949 which applies to property transferred in accordance with paragraph 51 or 51A of the Eighth Schedule to the Act.
In terms of the amended section 64B(5)(kA), the transfer of the property would have to effected as a dividend in specie in order to qualify for the secondary tax on companies ("STC") relief. There is no STC exemption for distribution of the profit in any other manner other than by way of a dividend in specie.
Despite the revision of the legislation, difficulties previously identified still exist. One such remaining difficulty is that the rules cannot be implemented successfully whilst the company concerned has liabilities (including loans from shareholders or bankers). Companies with existing liabilities cannot merely transfer the interest in the domestic residence to its shareholder, as section 90 of the Companies Act 61 of 1973 prohibits payments in any form to shareholders, if the company is, or would after the payment, be unable to pay its debts as they become due. The company would need to rid itself of its liabilities before being able to distribute the property in accordance with company law requirements and so make use of the paragraph 51A exemption. Dealing with such liabilities has potential adverse tax effects (and commercial implications) which require management.
At present, effecting transfers through the Deeds Office often results in unpredictable administrative delays. Under the current legislation it is thus often beyond the control of the taxpayer as to whether he/she will meet the deadline date for the transfer of the property. The revised legislation has thus shifted the effective date to the date of disposal of the property and not the date of transfer. The revised residential property amnesty comes into operation on 1 October 2010 and applies in respect of disposals made on or after that date and before 1 January 2013.
While the revised legislation on the face of it seems to have been amended to be more flexible that allows for greater utilisation of the amnesty, certain difficulties remain such as the one outlined above, which have not been dealt with. Taxpayers should thus be aware of the cracks in the wall that may appear on implementation of the rules to their structures and due consideration should accordingly be given to the facts of each particular case.