In current law, a concession exists for the transfer of residences out of companies or trusts providing relief from capital gains tax and other taxes. Since the inception of this relief there has been a debate about whether the tax relief provided in terms of the concession would extend to holiday homes or secondary residences.
The argument centres on the ambiguous wording of paragraph 51A of the Income Tax Act, 58 of 1962 (“the Act”), which does not expressly limit the transfer of a „main‟ or „primary‟ residence. Rather, the provision refers to a residence „mainly used for domestic purposes‟ in which one or more natural persons have „ordinarily resided‟.
The expression “ordinarily resided” is the main subject of contention. With no definition contained in the Act, the words “ordinarily resided” are not incompatible with a taxpayer saying that as part of his regular, ordinary life he spends several months a year living at his costal home. Or a taxpayer that spends his time commuting between his family home in Cape Town, where he lives during the weekend, and the apartment he owns in Johannesburg and lives during the week. If asked where he „ordinarily resides‟, the taxpayer could easily respond that he ordinarily resides in both homes.
The South African Revenue Service (“SARS”) has not readily accepted this interpretation and appear intent on limiting the relief offered by this concession to the primary or main residence of a taxpayer. Despite the existence of a definition for “primary residence” this concept was omitted from the wording of the provision. A reasonable assumption is that the legislature did not wish to unnecessarily limit such relief. Nonetheless, SARS expresses the view that “ordinary resides” needs to be determined with reference to common law principles. The problem is our common law only provides insight in relation to this phrase with reference to the test applied in determining whether a person is an ordinary resident of a particular tax jurisdiction. In these circumstances, our courts have expressed the view that it is logically impermissible for a person to be ordinary resident in more than one country, as one‟s ordinary residence would be the country to which one would naturally and as a matter of course return from his wanderings. Thus on this basis, the only true and ordinary residence of a person would be the one to which they naturally return. In the Guide on the Disposal of a Residence from a Company or a Trust SARS concludes that “in most cases a holiday home will not qualify because a person does not ordinarily reside in such a residence.”
A cynical comment is that the above is merely a construction to limit the relief to a person‟s “primary residence”. Admittedly, SARS concede that “it is possible that in some rare cases a person could ordinarily reside in more than one residence at the same time.”
An argument about the application of the aforementioned legal principles to the phrase “ordinarily resided” is rendered mute by the publication of the 2011 Draft Taxation Laws Amendment Bill (“Bill”). This is because the Bill brings finality to this debate by extending the relief to holiday homes and other residences by the removal of the words “ordinarily resided”. This coincides with government‟s initial objective of removing unnecessary entities from the company register, and the simplification of administration and enforcement.
The fundamental “mischief” that the provision seeks to prevent in this context is the application of this relief to holiday homes or other residences that are not used mainly for domestic purposes. That is, a residence that is not used for domestic purposes more than 50% of the time. For example, a holiday home at the coast that is used to derive rental income for the majority of the year.
The Bill introduces this amendment with retrospective effect to 1 October 2010, which means that some taxpayers, who have already transferred a holiday home, would have been prejudiced by SARS‟ interpretation of the current wording of paragraph 51A. SARS has indicated that “Should the law be amended retrospectively a refund may be sought.”
This relief is available until December 2012 and taxpayers are urged to take advantage of this concession.