The clock is ticking for tax-friendly property transfers

Time is running out to make use of the tax-friendly window period introduced by SARS in 2010, writes Nicholas Hayes of Smith Tabata Buchanan Boyes.

The relevant provisions allow taxpayers to transfer residential homes that they hold in companies, close corporations or trusts (entities), to their personal names without incurring the usual transfer duty and CGT liability.

However, the agreement to effect such a transaction must be signed before 31 December 2012.
This is how these provisions work:

Background :

Many people bought their residential properties in entities because of specific transfer duty and other tax advantages that previously existed for doing so. Since 2002, these advantages were markedly diluted by changes to taxation laws. The introduction of Capital Gains Tax in 2001 and other taxes imposed on companies has generally made it more onerous to hold residential property in an entity.

SARS therefore introduced legislation in which a limited window period has been (is) granted for taxpayers to transfer their homes from entities into their own names, free from Transfer Duty, Secondary Tax on Companies (STC) and CGT.

Details of Section 51 A :

If a residential home is held in an entity and-

  • was used mainly for (residential) domestic purposes since 11 February 2009 and up to the date of the disposal; and
  • the resident(s) is a "connected" person(s) to the entity;
  • then the property can be transferred to the natural person without paying the usual Transfer Duty or incurring liability for STC and CGT on that transaction.

The disposal must however occur before 31 December 2012 and the entity must take steps to wind-up, deregister or terminate within 6 months after the disposal.

Before the amendments gazetted on 12 January 2012 it was practice that the legislation could only apply to primary residences, which necessarily excluded holiday homes and excluded certain foreign resident owners making use of the opportunity. The change now means that, subject to all other requirements being met, holiday homes can be transferred and foreign residents may now take ownership from their property owning entity.

"Connected persons" :

The definition in the Act is long and intricate; to simplify, it can be said that a "connected person" is someone who is connected to the property-owning entity as family relation, trust beneficiary, by way of shareholding or holding of member's interest.

This opens up the possibility:

  • to use this legislation to transfer property held in multi-layered property structures, for example, where the taxpayer owns the property in an entity which is, in turn, owned by another entity.; and
  • for foreign owners of properties to make use of this tax-relief, in appropriate circumstances.)

It might not necessarily be advisable in all cases to transfer a property out of (the) a holding entity and much will depend on a taxpayer's overall tax situation and estate planning concerns.

However, for many taxpayers this will be an opportunity in which to structure their affairs and reduce their liability for taxes relating to the owning of their residences in entities

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