Capital gains tax relief for emigrants and expatriates
A look at what tax relief expatriates and emigrants qualify for on primary residence.
The globalisation of South Africa has resulted in an increased number of South Africans (expatriates) working abroad for extensive periods of time as well as South Africans emigrating to other countries (emigrants).
Expatriates and emigrants sometimes take advantage of favourable market conditions to dispose of their residential property in South Africa whilst they are situated abroad.
As a result, the question arises whether the expatriates and emigrants will qualify for the primary residence exclusion contained in the Eighth Schedule to the Income Tax Act, Act 58 of 1962 in respect of the disposal of such a property.
Primary residence exclusion
Paragraph 45 of the Eighth Schedule provides that a taxpayer must disregard the first R1.5 million of the capital gain or loss realised in respect of the disposal of a “”primary residence””.
Paragraph 44 of the Eighth Schedule defines a “”primary residence”” as:
• any residence in which a natural person or a special trust holds an interest; and
• which that person or a beneficiary of that special trust or a spouse of that person or beneficiary-
o ordinarily resides or resided in as his or her main residence; and
o uses or used mainly for domestic purposes.
It is fairly common for more than one person to have an interest in a primary residence, for example where two persons hold an undivided interest in the property (i.e. the property is registered in both their names) or in the instance of spouses married in community of property. In these cases the parties must note that the R1.5 million primary residence exclusion operates on a “”per primary residence”” basis and not on a “”per person holding an interest in the primary residence”” basis. This means that when, for example, two individuals have a 50/50 interest in the same primary residence, each of them will be entitled to a primary residence exclusion of a maximum of R750,000.
Emigrant disposing of property situated in South Africa
Should an Emigrant therefore dispose of the property which he/she regarded as a primary residence whilst the Emigrant was ordinarily resident in South Africa, the question is whether the Emigrant would qualify for the primary residence exclusion in respect of the property so disposed of?
Upon emigration, the Emigrant is no longer considered ordinarily resident in South Africa and would accordingly not be considered ordinarily resident in his/her residence from the date of emigration. However, no deemed disposal of the property takes place on emigration as South Africa retains its tax jurisdiction over the property under paragraph 2(1)(b) of the Eighth Schedule to the Act.
Therefore should the Emigrant sell his/her primary residence after emigration, such a disposal will attract capital gains tax by virtue of the provisions of paragraph 2(1)(b) of the Eighth Schedule, even though the Emigrant is no longer tax resident in South Africa.
Due to the fact that the Emigrant was ordinarily resident in the house whilst living in South Africa, the house would have been regarded as the Emigrants primary residence and should thus qualify for the primary residence exclusion contained in paragraph 45 of the Eighth Schedule of the Act. However, the Emigrant will not be entitled to the full R1.5million exclusion but an apportionment has to be made for the period during which the Emigrant was not ordinarily resident in the property whilst residing abroad.
It is important to note that it is the capital gain realised on the disposal of the property that must be apportioned and not the actual R1.5million exclusion. Accordingly the Emigrant will only be entitled to utilise the exclusion in respect of the portion of the capital gain which relates to the period during which he/she ordinarily resided in the property.
The apportionment can be illustrated through the following example:
Mr SA Emigrant emigrated from South Africa in September 2007 and is currently working and living in another country. He disposed of his residential property in South Africa for R4 million on 28 July 2009. Mr SA Emigrant acquired the house for R2.2 million in December 2001 and resided in the property for the period January 2002 to September 2007. Mr SA Emigrant will be able to reduce the capital gain on the sale of the property by the R1.5 million primary residence exclusion for the period during which the property qualified as his primary residence.
Mr SA Emigrants capital gains tax liability will therefore be calculated as follows:
From the above, it is clear that Mr SA Emigrant will be able to claim relief by apportioning the capital gain and minimise his capital gains tax exposure and effectively only pay tax on that part of the capital gain which relates to the period that he was no longer ordinarily resident in the property.
The Emigrant, as a non-resident seller, must take cognisance of the fact that he/she falls within the ambit of section 35A of the Act, which provides that a purchaser must withhold 5% of the purchase price if the seller is a non-resident unless the non-resident obtains a tax directive from the Commissioner: SARS which indicates that the purchaser of the property does not have to withhold any amount from the purchase price or must withhold a reduced amount.
In instances where the seller, i.e. the Emigrant, is able to avail him or herself of the primary residence exclusion, the capital gain in respect of such a disposal will in most instances be less than 5% of the purchase price and it would therefore be advisable for the Emigrant to apply to the Commissioner: SARS for the directive mentioned above.
Expatriate disposing of primary residence
It is fairly common for Expatriates working abroad to rent out their primary residence whilst physically absent from South Africa. In some instances these Expatriates may even dispose of their properties in due course. It is important for Expatriates who are South African tax residents to note that they may still qualify for the full primary residence exclusion or a part thereof when disposing of such a primary residence which was rented out during their absence from the country.
Expatriates who rent out their primary residence whilst abroad should note that the provisions of paragraph 49 of the Eighth Schedule to the Act will apply when disposing of that property, thus requiring them to apportion the capital gain qualifying for the R1.5 million primary residence exclusion with reference to the period during which the property was used as a primary residence and the period during which that property was let out to tenants.
The apportionment required by paragraph 49 can be illustrated by means of the following example:
Mr Expat has been relocated to London by his employer to work at the employers London branch on 1 September 2007. Mr Expat is letting his primary residence in Sandton for the duration of his absence. The property was rented from 1 September 2007 up to 28 January 2010. Whilst still residing in London, Mr Expat received a lucrative offer for his property in Sandton which he accepted on 30 January 2010. Mr Expat sold the property for R5 million, whilst his base cost on 1 March 2004, was R3 million.
Mr Expat will be able to reduce the taxable capital gain by the R1.5 million primary residence exclusion based on the period during which the property was used as a primary residence and not for trading purposes.
Mr Expats capital gains tax liability will therefore be calculated as follows:
However, the situation may be different for an Expat who rented his property during his absence from South Africa, but who only disposed of his property once he returned to South Africa and resided in that property for a year after his return.
Expats who lived in their primary residence for a period of at least one year before their relocation abroad and at least one year after returning to South Africa, may qualify for the relief afforded by paragraph 50 of the Eighth Schedule to the Act. Paragraph 50 of the Eighth Schedule to the Act allows a qualifying person to rent out his/her primary residence, for a limited period, without that rental activity disqualifying that period of ownership as non-residential usage as envisaged by paragraph 49 of the Eighth Schedule to the Act, thereby allowing the Expat to utilise the full R1.5 million primary exclusion.
However, paragraph 50 of the Eighth Schedule to the
Act will only apply where:
– The primary residence was not let for more than five years. It must be pointed out that if a primary residence was let for, say, six years, the full six years will be regarded as non-residential use and not just the period in excess of five years.
– The qualifying person would have to actually reside in that primary residence for a continuous period of at least one year before and after the period that the primary residence was let.
– No other residence would be treated as the primary residence of the qualifying person during the period that a primary residence was let and retained its status as a primary residence of that qualifying person; and
– The qualifying person must be temporarily absent from South Africa or employed or engaged in carrying on business in South Africa at a location further than 250km from the residence.
Emigrants and expats may dispose of properties situated in South Africa which qualified as the Emigrants and Expats primary residence and still utilise the R1.5m primary residence exclusion when determining the capital gain or loss arising from the disposal of that property in certain circumstances.
All material subject to our Legal Disclaimers.