Disposal of a primary residence (“residence”) from a company or trust to natural persons

The provisions contained in paragraph 51 of the Eighth Schedule to the Income Tax Act No. 58 of 1962 (“the Act”) catered for the disposal of a residence by a company or trust to a natural person, before 30 September 2010 whereas paragraph 51A, recently introduced into the Act, caters for such disposals between 1 October 2010 and 31 December 2012 (“the qualifying period”).

If the requirements set out in paragraph 51A are met, the disposal of the residence to the natural person will not give rise to any tax consequences. The tax consequences are effectively postponed until the ultimate disposal of the residence by the natural person at a future date (“rollover relief”).

One of the notable differences between paragraph 51 and 51A of the Act is that qualifying multi-tiered entities can now also qualify for rollover relief upon transfer of the residence to a natural person.

The following requirements must be met to qualify for the rollover relief contained in paragraph 51A:

– The disposal of the residence must take place within the qualifying period;
– The natural person acquiring the residence must be a connected person in relation to the company or the trust (“qualifying natural person”), for example: a beneficiary of the trust or a shareholder (there are minimum shareholding requirements which should be met) of the company or a relative in relation to the aforementioned persons;
– The qualifying natural person must have used the residence mainly for domestic purposes, during the period commencing on 11 February 2009 and ending on the date of the disposal; and
– Within 6 months of the date of disposal certain prescribed steps must be taken to terminate the corporate existence of the company or revoke the trust.

Capital gains tax (“CGT”) implications of disposal of the residence and termination of the company or trust

Simplistically, upon disposal of the residence and termination of the company or trust:

– Any capital gain or loss upon disposal of the shares in the company or interest in the trust is disregarded;
– the company or trust will be deemed to have disposed of the residence at the base cost; and
– the base cost of, either the shares in the company plus the cost of any subsequent improvements or the base cost of the residence in the company or trust is rolled over to the qualifying natural person.

Consequently there are no CGT consequences for either the qualifying natural person or the company or trust.

Transfer duty (“TD”) and Secondary tax on companies (“STC”) implications
– No TD is payable in respect of the acquisition of the residence by the qualifying natural person.
– No STC is payable by a company provided the residence is distributed as a dividend in specie.

Approach with respect to multi-tiered structures

The rollover relief also extends to multi-tiered structures regardless of how many trusts and companies are in the chain, as long as these entities are terminated within six months of the respective disposals of the residence and the residence is ultimately acquired by the qualifying natural person within the qualifying period.

Although the rollover relief is beneficial for a person wanting to transfer their primary residence into their own hands in order to, amongst other reasons, qualify for the primary residence exclusion upon disposal of the residence in the future, it is important to note that this relief might not be beneficial to trusts or companies that own other significant assets apart from the residence as the rollover relief is not applicable to the disposal of any other assets. Therefore, the consequent tax liability arising as a result of terminating the company or trust which has other high growth assets must be weighed up against the benefit of holding the residence in the name of the natural person.

TAXtalk: www.taxtalk.co.za

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