Difficulties of transferring property from a CC, a Company or a Trust still not appreciated
Although there has been a fair amount of coverage in the media on the new tax breaks regarding the transfer of property from close corporations, companies and trusts to individuals (provided this is done before the end of 2011), Greeff Properties' experience indicates that some of the main points have not yet been grasped by those who could - and in most cases should - be reacting to the new tax breaks.
This was said recently by Simon Raab, Sales Manager of Greeff Properties' Southern Suburbs team. Quoting from a newsletter sent from a firm of attorneys, Raab said, "The first and most important point to grasp is that there are now likely to be huge capital gains advantages to holding a primary home in the individual's name."
A primary home, he added, is one is which is registered in the individual's name in which he ordinarily lives most of the time.
If the primary residence is registered in an individual's name, the first R1,5 million capital gain on such a home is exempted and the balance of the gain will be taxed at a maximum rate of 10%. This, said Raab, compares favourably with the effective 14% rate for companies and close corporations and with the effective 20% tax rate levied on trusts.
"That is an important point to understand," said Raab, "but equally relevant is the fact that an additional annual tax exemption of R17 500 also applies to natural persons and this increases to R120 000 in the event of the death of the owner."
Furthermore, added Raab, if the beneficiary of a company wishes to take the proceeds out of that holding entity he will have to pay an additional STC tax - i.e. the secondary tax on companies.
Explaining how this would work, Raab said that on a R2 million capital gain the individual would pay a maximum of R50 000 (if primary residence exemption applies) or a maximum of R200 000 Capital Gains Tax if no exemption, whereas a company or close corporation would have to pay R280 000 and a trust R400 000 based on the current tax rates.
With so many obvious advantages accruing to those who do transfer their property to an individual what could be the drawbacks?
Raab said that on the whole they are insignificant, but if the property is bonded it is possible that the bank will refuse to accept the individual as a substitute for the company, close corporation or trust as the bondholder. They might, he said, quite easily insist on the cancellation of the bond (for which three months' notice has to be given) and on the individual applying for a new bond. This, said Raab, could be at a higher interest rate and it is also possible that the individual's application could be refused because under the new National Credit Act his credit rating is not deemed to be satisfactory despite the new assets coming into his name.
It is also important to realise, said Raab, that bond qualification approvals and the South African Reserve Bank's validation procedures can take several months. If, therefore, the individual wishes to take transfer he must do so well ahead of the 2011 deadline.
Article by: www.greeff.co.za