Rare legislative concession gives tax relief on domestic residences

The Draft 2009 Taxation Laws Amendments contain a proposal that, if enacted, will allow individuals to transfer their domestic residence out of a company or close-corporation, for a period of two years, tax-free. The motivation for the proposal was to allow such entities to avoid the payment of annual duties.

David Warneke, a tax specialist and partner at Cameron & Prentice Chartered Accountants, explains that although similar relief was previously available, where the residence had to be acquired out of the company or close corporation by 30 September 2002, the current proposal is narrower than the previous relief in a number of respects.

“Trusts that distribute domestic residences will not benefit from any relief. Also, all of the shares or members’ interests in the entity have to be held by the person residing in the property, or that person’s spouse, during the period from 11 February 2009 until the date the residence is distributed out of the entity.”

“The residence has to be used exclusively for domestic purposes during the above period and has to be the sole asset of the company or close corporation. It must also be distributed out of the entity between the 1st of January 2010 and the 31st of December 2011 and finally, the entity has to be wound up after the above distribution.”

Despite the narrower relief mentioned above, Warneke explains that the effect of the proposal is that the transfer will be free from Capital Gains Tax, Secondary Tax on Companies and Transfer Duty. The transferee will also be able to benefit from the R1.5 million ‘primary residence exclusion’ from CGT if the residence is subsequently sold for a profit.

“The transfer will be treated as a ‘roll-over’, meaning that the transferee will step into the shoes of the transferring entity insofar as the history of the residence is concerned.”

“Although transferring a growth asset into the hands of a natural person usually leads to an increased Estate Duty liability,” advises Warneke, “it must be remembered that the only entities that qualify for the relief are those in which the natural persons held all the equity. Therefore the transfer will be tax-neutral from the point of view of Estate Duty.”

“This is an example of an uncommon legislative concession and should the proposal in fact become law, we strongly encourage those taxpayers who did not take advantage of the previous concession to do so this time,” concludes Warneke.

Article by: www.campren.co.za