Ensure a Transfer Duty with No Surprises Part 3
I have recently been inundated by elderly parents wishing to transfer their immovable property to their children before they pass away. I reminded the parents that if the children are not liable to pay for the property, the transaction may be deemed to be a donation by the South African Revenue Services (SARS), and they would be liable for donations tax. As stated in Part 1 of this article, transfer duty is levied for the benefit of the National Revenue Fund on the value of a property acquired by any person by way of a transaction or in any other way. A donation of immovable property falls within this definition and the transaction will therefore attract transfer duty. To illustrate that this would be a costly affair, consider the following example: should the property be valued at R2 million, the transfer duty payable would be R41 625. SARS would furthermore require donations tax to be paid on the value of the property, less the annual exemption of R1 million at 20% i.e. R380 000. The parents would be ill-advised to do so and should rather bequeath the property to their children in their wills due to an exemption on paying transfer duty contained in the Transfer Duty Act 40 of 1949 (hereinafter referred to as the “Act”). Section 9(1)(e) of the Act states that an heir or legatee who acquires the property of the deceased, whether by intestate or testamentary succession or because of the re-distribution of the assets of a deceased estate, is exempt from the paying of duty. As the bequest is testamentary in nature and not a donation there will be no donations tax payable. The conveyancing fee for the transfer of the property is an estate cost/disbursement and is not for the account of the beneficiary. This is one of a myriad of exemptions in the Act. No duty is payable in respect of the acquisition of property by the government, provincial administration, and a municipality. Similarly, a public benefit organisation is defined in the Income Tax Act 58 of 1962. This includes any institution, board or body which is exempt from tax in terms of Section 10(1)(cA)(i) of the aforesaid Act and which has its sole or principal object carrying on any public benefit activity contemplated by the Act. If a property is acquired for the purpose of a public hospital, for example, there will be no transfer duty levied. An exemption from paying transfer duty is also applicable in the following circumstances: If a divorce occurs and one spouse becomes the sole owner of a property that was originally registered in the name of the other spouse. If a surviving spouse becomes the sole owner of a property that was originally registered in the name of the deceased spouse, and the property is transferred to them as a result of death. If one spouse had already acquired a property before getting married, and they later get married in community of property, the other spouse automatically acquires an undivided half-share in that property by operation of law. Any company in terms of both an amalgamation transaction and an asset-for-share transaction as set out in Sections 44 and 42 of the Income Tax Act of 1962. In the event of a testamentary trust where trust property is transferred by the administrator/trustee as stipulated by the will. Where the acquisition of the property, which is for purposes of the Value-Added-Tax Act 1991, is a taxable supply of goods to the person acquiring such property. This is why developers can advertise that there is no transfer duty payable on the advertised price of the unit, as an exemption applies. If a person who owns a share in a share block company decides to convert their right to use a specific unit of immovable property into full ownership of that unit, as allowed by the Share Blocks Control Act 59 of 1980. Keep in mind that acquiring a property may trigger numerous duties and affect both the purchaser and the seller. To avoid any surprises in this regard, one should seek sound advice from a legal or tax practitioner. WRITTEN BY GRANT HILL While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.
How SARS catches tax-dodgers
SARS auditors employ methods that most people wouldn’t have even considered. How does the South African Revenue Service (SARS) catch those who do not contribute their fair share to state coffers? Here are some tests that SARS auditors perform to see if you are being somewhat economical with the truth. Comparing VAT returns to your income tax return When you submit your IT14 company tax return, you are required to make certain disclosures including your company’s turnover. But according to Mark Twain, if you tell the truth, you don’t have to remember anything. If you are cooking the books, at least try to remember to make sure that your turnover per your VAT return tallies up with the turnover disclosed in your financial statements. Because many tax dodgers are dumb as well, SARS catches many a tax reprobate by doing this simple cross-check. Whichever way you try to fiddle with the numbers, SARS has got you. If the turnover in the VAT returns is short, you will get nailed for under-declaring your VAT. If it is the income statement figure that is light, then you haven’t declared all your sales for income tax purposes. In both cases, you will land in hot water. Checking your tax returns against other records Did you know that the details in the Deeds Office and the National Vehicle Registry are a matter of public record? SARS does and they catch many a tax evader through a couple of simple checks. For instance, if you have a Porsche and a Sandton penthouse registered in your name, and you have declared income of R40 000 per month, you may have some explaining to do. Working out that the car and the house will be setting you back the best part of R100 000 per month in repayments is not rocket science, particularly if these items have been purchased recently and the titleholder is a bank, or a mortgage is registered against the property. And don’t try to claim that you have inherited something when you haven’t wills are also public documents, and for a SARS auditor to pay a visit to the offices of the Master of the Supreme Court is no problem. Observing your lifestyle Do you play golf, go on holiday at a posh resort, or dine in fancy restaurants? Guess what SARS employees do as well. Contrary to popular belief, people who work for SARS do have a life outside of work, and they enjoy the finer things in life just as much as the rest of us do. And it’s amazing how much people reveal about themselves after a few beers or one or two bottles of wine particularly when it comes to some smart scheme they have cooked up to “put one over the taxman” (or so they think). “The walls have ears”, and so do SARS employees. However, even if you don’t shoot off at the mouth, the fact that you are able to afford such niceties must say something about your income levels. A quick glance at your most recent tax return will reveal how honest you have been in declaring what you earn. Using some common sense One of the oldest tricks in the book is to fiddle with the cost of your car, or inflate the number of kilometres travelled. But as we revealed in the previous paragraph, SARS employees do sometimes venture out into the big wide world. They also watch TopGear, and they know how much various cars cost. And although even entry-level cars will set you back a pretty penny nowadays, don’t think you are being clever by listing that VW Polo Vivo at R500 000. They also sit in the same traffic that you do each morning. They know what the approximate distance is between Johannesburg and Pretoria. They also have a fairly good idea of which jobs involve extensive travel, and which ones don’t. Such snippets of information are stored in the collective memory banks of SARS audit teams, ready to be recalled when they look at your return. And how about fiddling with that odometer reading? Think again there are ways of checking this as well. When you renew your licence each year, you are required to declare the odometer reading on the form. While this measure is primarily to stop people from putting their cars through the ‘fountain of youth’ when the time comes to sell, it is also a useful thing for SARS to check and compare to what you have declared on your return. There have also been a number of instances where SARS has called for service records. Alternatively, they simply call you up and request that you make your vehicle available for inspection on a given day. As far as your logbook is concerned, SARS not only requires extensive details of your trips (i.e. they no longer just accept ‘client visit’ they’re now after names and addresses), but their auditors are a whizz on Google Maps. You also may have some explaining to do if you’re Joburg-based and have travelled to Durban on ‘business’ two days after the schools have broken up for the December holidays. If you genuinely do make a business trip of this nature, it’s a good idea to have some supporting documents confirming this. Following the paper trail A couple of years ago, SARS changed the requirements for a valid tax invoice, to be issued whenever VAT is charged. For those invoices exceeding R5 000, you are now required to include not only your own address and VAT number on the invoice but that of your customer as well. The reason for this is to create a paper trail for SARS auditors to follow. When they conduct an audit at your business premises, they also note down some VAT numbers from your invoices. Upon their return to the office, these numbers are checked on their systems. Many a fictitious VAT number has been uncovered in this manner, while this method also
Your retirement ‘gift’ to SARS
In last month’s issue of Tax Breaks, we dealt with the tax treatment of retirement lump sums when one resigns or is dismissed (prior to reaching normal retirement age). However, when you actually retire from a retirement fund, the rules are a bit different – and SARS gives you a bit more of a break. Definition of retirement In the ‘good old days,’ retirement meant that you had reached a certain stage where you stopped working, had a shindig at which you were presented with your gold watch, went on pension, and spent the rest of your days trying (unsuccessfully) to perfect your golf swing. However, everyday words always seem to mean something different when it comes to tax, and the concept of retirement is no different. From a tax point of view, the term ‘retirement’ refers not to the time when you decide (or circumstances force you) to stop working, but rather the event that triggers your retirement from a retirement benefit fund. The difference between ‘retirement’ and ‘withdrawal’ is that should you elect to receive your entire fund or part thereof as a lump sum, such lump sum is taxed at more favourable rates if your exit from the fund qualifies as a retirement. You can therefore ‘retire’ from a fund in the following circumstances: Any time from your 55th birthday onwards; or At any age, provided that such retirement is due to disability or ill-health. In most cases you will only be entitled to retire if such disability or ill-health is of a permanent or long-term nature. Note that retiring doesn’t mean that you will never be entitled to work again. With modern healthcare and more active lifestyles, many people are being retained as consultants – or even starting completely new careers. Even in the case of ill-health or disability retirements, there are many cases where the person’s disability or health status nonetheless enables them to work in areas that are less physically strenuous than the job from which they were medically boarded. Taxation of lump-sum benefits upon retirement Using similar scenarios as in last month’s article, except for the fact that the person has retired rather than withdrawn from their fund, the tax calculation is as per the table below. Transfer of benefits to another retirement fund If you have reached retirement age but you plan to continue working, you need to have both a tax consultant and an investment advisor run the numbers for you, especially if you don’t need to start drawing a pension immediately. Depending on your personal circumstances and tax position, it may be more advantageous for you to withdraw from your employer’s fund and transfer the benefits to another fund, or consider making your fund “paid up” (provided that the rules allow for this) rather than to take a retirement benefit. However, make sure that you take all of the possible implications into account, especially if you are entitled to receive certain post-retirement benefits (such as subsidised medical aid or the enjoyment of staff discount benefits that may be extended to retired employees as well). The last thing you want is to resign rather than retire in order to save a little bit of tax, but then end up with no post-retirement medical cover! Pensions / annuities In the case of your retirement from a pension or retirement annuity fund, your lump sum is usually limited to one-third of the total amount invested. The balance must be utilised to purchase an annuity (pension). Such annuity is fully taxable, just like your salary used to be (except that you no longer have a car allowance or other tax-preferential perks). This is different to voluntary purchase annuities, where part of the annuity represents the return of capital (with only the income portion therefore subject to tax). Lump sums received upon retrenchment With effect from 1 March 2011, severance benefits received will be treated on the same basis as a retirement lump sum, thus qualifying for the preferential tax treatment. However, if you are retrenched prior to your 55th birthday, you will not be able to retire from your retirement fund-which means that any lump sums paid out from your retirement fund will still be treated as a withdrawal (unless your severance has been for reasons of ill-health, in which case the normal retirement lump sum tax tables are applicable). In practice, your employer and your retirement fund are separate legal entities, and you should therefore be receiving two IRP5 certificates. The biggest tax risk is that since (for example) your employer’s payroll department will be dealing with your severance, while a fund manager could be handling the retirement fund, it’s possible that either (or both) entities might not know the full circumstances of your severance, and end up putting the wrong lump sum codes on the directive application. It is therefore critical that you receive appropriate tax advice once you have received notification of your severance package and available retirement fund lump sum, but before any tax directives are applied for. Once the directive has been and the IRP5 certificates have been issued, rectifying any errors is both difficult and time-consuming – in the case of one of my own clients, it took two years to sort things out with the employer and get the excess tax refunded by SARS. Receipt of previous retirement benefits The tax tables applicable to retirement fund lump sums received upon retirement are ‘once-in-a-lifetime’ scales. As will be seen more clearly from the calculation example above, this means that while a first-time taxable retirement lump sum of R500 000 would be exempt from tax, a subsequent lump sum of R200 000 would be subject to tax at 18%, being the rate applicable to the next band. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information
Home office expenses: Do I qualify?
Tax practitioners have been inundated with queries from clients on the possible relief offered by the South African Revenue Service (“SARS”) on the possibility of deducting from their taxable income home office expenses due to the shift in working policies by many employers. SARS recently hosted a webinar on the matter (the summary of which is available on the SARS website). Below, we explore the most pertinent matters. When will I be able to claim home office expenses? If you are an employee who works from home and have set aside a room to be occupied for the purpose of “trade” (i.e. work activities), you may be allowed to deduct certain home office expenses for tax purposes calculated on a pro-rata basis. What are the requirements for claiming home office expenses? Section 23(b) of the Income Tax Act states that a tax deduction for home office expenses is only allowed when the following criteria are met: If the room is regularly and exclusively used for the purposes of the taxpayer’s trade and is specifically equipped for that purpose. The home office must be set up solely for the purpose of working. If the employee’s remuneration is only salary, the duties are mainly performed in this part of the home, meaning the employee must perform more than 50% of their duties in the home office. Where more than 50% of the employee’s remuneration consists of commission or variable payments based on work performance, and more than 50% of those duties are performed outside of an office provided by your employer. What constitutes home office expenditure? Typically, the type of home office expenditure referred to in section 23(b) is as follows: Rent of the premises; Cost of repairs to the premises; and Expenses in connection with the premises. In addition to these expenses, other typical home office expenditure that may qualify for deduction in terms of section 23(m) include: Phones; Internet; Stationery; Rates and taxes; Cleaning; Office equipment; and Wear-and-tear. How do I calculate home office expenses? The tax deduction is calculated for the area of the home utilised for trade e.g. employment purposes. Home office expenses relating to the premises are calculated on a pro-rated basis (square metres of the home office space versus total square meters of your home). What is the method of calculating home office expenses? Should you qualify for a deduction in respect of home office expenses, the amount must be calculated on the following basis: A / B x total costs, where: A = the area in m² of the area specifically equipped and used regularly and exclusively for trade B = the total area in m² of the residence (including any outbuildings and the area used for trade in the residence) Total costs = the costs incurred in the acquisition and upkeep of the property (excluding expenses of a capital nature). Where will I claim home office expenses on my Income Tax Return (ITR12)? Should you qualify for a deduction in respect of a home office, enter the amount calculated next to the source code 4028 (Home Office Expenses) in the “Other Deduction” field on your Income Tax Return. I want to complete the home office expenses but it does not reflect on the form wizard questionnaire. When completing the form wizard on the Income Tax return (ITR12), answer the question “Did you incur any expenditure that you wish to claim as a deduction that was not addressed by the previous questions?” (Select ‘Y’ or ‘N’). If yes, the section for ‘Other Deductions’ will be added to the return. If you require any assistance with claiming your home office expenses this tax season, or have any further questions about your tax returns, get in touch with our team of expert tax specialists to assist you. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Submit your return on time, or face penalties
Non-residents and earners of foreign income are also receiving extra attention this year The tax season for the 2022 tax year has just started, and it will be one of the shortest to date. The period to submit tax returns opened on 1 July 2022 and runs to 24 October 2022 for individual taxpayers who are not provisional taxpayers. Determining whether you need to file a tax return On 3 June 2022, SARS Commissioner Edward Kieswetter declared who he requires to file a tax return for the 2022 filing season. In general, you only need to submit a tax return if any of the following circumstances apply to you: You received a salary or retirement income from more than one source; Your salary or retirement income was from a single source, but exceeded R500 000; You conducted a trade within or outside South Africa; You are a South African tax resident but received employment income from outside South Africa; You receive travel, subsistence, or office-bearer allowance against which you will be claiming expenses; You have a company car; You held funds in foreign currency or assets outside South Africa with a combined value exceeding R250 000 at any stage during the tax year; You had capital gains or losses exceeding R40 000 on the disposal of local assets; You received income or capital gains from any foreign asset; or You hold participation rights in a Controlled Foreign Company. However, if a tax return is issued to you or you receive notification from SARS that you are required to submit a return, such return will need to be submitted even if you have answered ‘no’ to all of the criteria listed above. Comments on the notice issued by the SARS commissioner The Commissioner indicated in his notice that he requires South African tax residents to disclose their foreign assets and funds they held during the 2022 tax year. He also requires tax residents to declare all foreign-sourced earnings (irrespective of the amount received) and mentioned more than once that residents who received any amount for services rendered abroad need to submit tax returns. This underlines SARS’s continuous focus on South Africans who are working in foreign countries, and it is critical that these South Africans declare their foreign earnings – even if they are subject to the foreign exemption, and irrespective of whether tax has been deducted by the foreign jurisdiction (although such tax will entitle the taxpayer to foreign tax credits to the extent that such tax does not exceed the equivalent South African tax liability on such income). Only taxpayers who do not fulfill the South African residence tests do not need to declare their foreign earnings or assets. It is thus critical for South Africans who have left the country permanently to formalise their non-resident status with SARS in order to align their factual situation with their SARS tax status. Taxpayers who have completed the Tax Emigration process in order to become non-resident for tax purposes are only taxed on South African sourced earnings, and not their worldwide earnings. Accordingly, SARS is taking an extremely stringent approach in considering whether or not a taxpayer is non-resident. Also, bear in mind that while there is an option to include the date upon which you ceased tax residency in your tax return, doing so does not result in the necessary manual intervention by SARS to prove and obtain non-resident status in the majority of cases. SARS KEY TAX SUBMISSION DATES Filing Season 2022 24 Oct 2022 Taxpayers other than provisional taxpayers filing online (eFiling or MobiApp) 24 Oct 2022 All taxpayers unable to file online (to be done at a SARS branch by appointment) 23 Jan 2023 Provisional taxpayers filing online (eFiling or MobiApp) Provisional tax returns 31 Aug 2022 First provisional tax return and payment, 2023 tax year 30 Sep 2022 Third provisional tax return (voluntary top-up) and payment, 2022 tax year 28 Feb 2023 Second provisional tax return and payment, 2023 tax year The Notice of Non-Resident letter is currently the most reliable form of proof that you are recognised as a non-resident. If you are a South African permanently living abroad and have not received this letter, the chances are good that you are still recognised as a tax resident on SARS’s systems. SARS will be issuing penalties for late submissions To prevent any administrative penalties for late submission, it is critical that you submit the 2022 tax return within the SARS-mandated filing period (see box below). Late in the 2021 filing season, SARS announced that taxpayers who file their tax returns after the filing season’s deadline will face administrative penalties. SARS appeared to be particularly strict in the application of their notice since penalties were issued on practically all returns submitted after the filing season for the 2021 tax year had closed. The penalty amount will depend on taxable income or assessed loss of the taxpayer and ranges between R250 and R16 000 per month. The monthly penalty as determined in accordance with your taxable income or assessed loss can be applied on a monthly basis for up to 35 months. It is therefore imperative that taxpayers (whether a tax resident in South Africa or not) take Filing Season seriously. The general view of South Africans abroad is that “SARS will never catch me”, or “I refuse to pay/give anything to SARS/that government”. While that view is understandable where one sees maladministration and corruption running rife in South Africa, it does not stand as a defence to taxpayers who do not meet their legal obligations to file a tax return and declare the relevant income. A taxpayer’s best defence is to be proactive with SARS and ensure that they remain complaint in terms of the Acts, so as to not give SARS any ammunition to raise penalties or worse. Written by JONTY LEON and REINERT VAN RENSBURG While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of
Analysing tax exemption for dividends
Dividends are a valuable part of many shareholders’ income, but even though they are exempt from regular income tax, it does not mean that they are completely exempt from tax. A dividend can be defined as any local or foreign dividend paid by a resident company of South Africa or a foreign country, provided that the foreign dividend is paid as a listed share and to the extent that the foreign dividend does not consist of an asset in specie. Dividends that South African tax residents receive are generally exempt from income tax. However, the mere fact that these dividends are exempt from income tax does not necessarily mean that they are not subject to tax. Dividends tax is imposed at a rate of 20% on all dividends that are declared and paid. The beneficial owner of a dividend, typically the shareholder, is liable for dividends tax in most cases. However, should the dividend in question consist of an asset in specie, the liability falls on the company paying the dividend and not on the beneficial owner. There are instances in which dividends tax will not be levied, specifically where the beneficial owner of the dividend is either a South African resident company, a South African retirement fund, or any other prescribed exempt person. Dividends tax operates as a withholding tax. The company that declares the taxable dividend must withhold and pay an amount directly over to SARS on behalf of the recipient taxpayer. Where a regulated intermediary pays a dividend, it is responsible for withholding the applicable dividends tax. The Income Tax Act, No. 58 of 1962 (the Act) caters for several instances in which a dividend declaring company is freed from the obligation to withhold dividends tax. The dividend declaring company would not have to withhold the dividends tax from the payment of a dividend provided that the dividends are declared to identified persons. These instances include the following: Where the person to whom the payment is made has, before the dividend payment, submitted to the dividend declaring company in the prescribed form that the dividend is exempt from dividends tax in terms of section 64F of the Act; A written undertaking by the beneficial owner in the prescribed form in which the declaring company is informed that the beneficial owner changed or the circumstances affecting the exemption applicable to the beneficial owner changed; Where the beneficial owner forms part of the same group of companies as the dividend declaring company; and Where the payment is made to an intermediary. Irrespective of the instances in which a dividend declaring company is freed from the obligation to withhold dividends tax, it is important to note that withholding tax is more likely than not to be reduced should a double taxation agreement find application. If you want to find out more about dividends tax and how it may affect you, do not hesitate to contact one of our expert advisers for further assistance. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Emigrating while retaining your property?
The exodus of South Africans to foreign jurisdictions has been well publicised, and due to this, much has been written about the so-called “exit tax” that applies when one ceases to be a tax resident in South Africa, as well as matters relating to foreign employment income earned. However, what is often overlooked is what happens when you emigrate but retain your home in South Africa. The general principle is that when you cease to be a South African tax resident, your home (constituting immovable property in South Africa) will not be subject to the “exit charge”, since that immovable property always remains a part of the South African tax net. This means that should you initially keep your home in South Africa and only sell it a few years down the line, you are only likely to pick up any capital gains tax consequences once you do sell the home. The question arises, however: What is the interaction is between you having used your home as a primary residence whilst in South Africa and you not having lived there after your emigration? It is important to note that the way in which you used your residence whilst not actually living there while aboard is irrelevant for the consideration below. In terms of the Income Tax Act, the first R2 million of a capital gain made on the disposal of a “primary residence” is excluded for purposes of calculating your tax liability. However, since you were not resident in your home for the entire time during which you owned the property, it will not constitute as being your “primary residence” for the entire time. An apportionment must thus be made for the time during which you lived in that residence, and the time you used it for other purposes. Taxpayers are often incorrectly advised that for purposes of the apportionment mentioned above it is the primary residence exclusion of R2 million that must be apportioned on a time basis to determine the capital gains tax exposure. However, paragraph 47 of the Eighth Schedule of the Income Tax Act is clear in that it is the capital gain that must be apportioned on a time basis for the period you were resident and the period in which you were not resident. The gain made in respect of the period during which you did not reside in the property as your primary residence is fully subject to capital gains tax, while the R2 million primary residence exclusion can only be applied to that portion of the gain during which you indeed resided in the property, as your primary residence. Persons who currently reside aboard or intend to emigrate while retaining their property, which they used as a primary residence at some stage, are therefore encouraged to obtain professional assistance when doing the apportionment calculations to ensure that they are not prejudiced in any way (either through the overpayment or underpayment of tax in respect of the disposal of that property). This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Immovable property ownership and spouses
INTRODUCTION When does a spouse who is entitled to receive a half share in immovable property become the owner of that half share? Does the real right in respect of half share in immovable property vest immediately upon granting of a divorce decree or does a spouse acquire personal right to claim formal transfer in the Deeds Registry by virtue of the divorce order? These questions were decided in a judgment of Fischer v Ubomi: Ushishi Trading CC and others 2019 (2) SA 117 (SCA) (“Fischer”). FACTS In Fischer, the appellant sued the first respondent for payment of R566 500.00, based on an acknowledgment of debt by the first respondent and a suretyship agreement concluded by the second respondent for its indebtedness. The second and third respondent were the registered owners of the immovable property. Their marriage in community of property was dissolved by a divorce. In terms of a settlement agreement incorporated into a divorce order, the second respondent waived his rights, title, and interest in the property in favour of the third respondent. The second respondent and the third respondent remarried in April 2014, out of community of property with the exclusion of the accrual system. They subsequently divorced again in 2015, and in terms of the second divorce order, the parties would retain their respective possessions. HIGH COURT (COURT A QUO) The appellant applied to the court for an order declaring the second respondent’s half share in the property executable. The third respondent raised the defence that she had full ownership of the property. The court held that upon granting of the decree of divorce, dominium of the property vested with immediate effect in the third respondent. In its judgment, the court considered two cases: Corporate liquidators (Pty) Ltd and Another v Wiggill and others 2007 (2) SA 520 (T) (“Corporate Liquidators”) and Middleton v Middleton and Another 2010 (1) SA 179 (D) (“Middleton”). In Corporate Liquidators, it was held that where parties enter into a settlement agreement regarding the division of their assets, which is made an order of court, ownership of the immovable property vests immediately. In Middleton, the court held that a settlement agreement only creates a personal right for the transfer of ownership as the divorce order cannot vest ownership without transfer or delivery. The High Court therefore followed the decision of Corporate Liquidators and dismissed the application. SUPREME COURT OF APPEAL (SCA) The SCA considered section 16 of the Deeds Registries Act (‘DRA”) as a starting point in deciding whether ownership of the property vests immediately on divorce. Section 16 of the DRA provides: “How real rights shall be transferred Save as otherwise provided in this Act or in any other law the ownership of land may be conveyed from one person to another only by means of a deed of transfer executed or attested by the registrar, and other real rights in land may be conveyed from one person to another only by means of a deed of cession attested by a notary public and registered by the registrar…” The SCA held that the court a quo erred in finding that the ownership vested immediately upon granting of a divorce order. It held that the third respondent’s acquisition of property was derivative in nature, that is, by way of a settlement agreement which provided the third respondent with the personal right to enforce registration of the second respondent’s half share in the property. Accordingly, the settlement agreement, as per the court order, is binding on the former owner and the party acquiring the property, but it does not by itself pass ownership of the half share to the party acquiring property. The court, however, held that, at the time the divorce order was granted, there was no other greater or competing right to defeat the spouse acquiring the property’s claim. When the appellant sought the second respondent’s half share in the property, it had already been alienated to the third respondent. The appellant’s claim was preceded by the personal right in favour of the third respondent. The appeal was therefore dismissed. CONCLUSION This case has settled that transfer of property, which has been alienated in terms of a divorce order, does not immediately pass to the spouse acquiring it. For ownership of the property to pass, it is a prerequisite that the title deed be endorsed by the Registrar of Deeds. As such, if the title deed has not been endorsed, a creditor may seek an order declaring the former owner’s half share of the property especially executable. The only defence available to the spouse acquiring the property would be to prove that the personal right to individual full ownership of the property preceded the creditor’s claim. REFERENCE LIST Fischer v Ubomi: Ushishi Trading CC and others 2019 (2) SA 117 (SCA). L. Lobola ‘When does a Real Right to a half-share of Immovable Property vest in a spouse?’ July 2019. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
What is a “transaction” for transfer duty purposes?
According to reports, given current low interest rates, there have been an uptick in property transactions. Therefore, it is worthwhile considering the potential impact of any transfer duty taxes to be imposed on such transactions. The Transfer Duty Act imposes a transfer duty on the value of any property acquired by any person by way of a transaction, or in any other manner, or on the value by which any property is enhanced by the renunciation of an interest in or restriction upon the use or disposal of that property. For this reason the underlying concept of acquisition and important definitions in establishing whether there is a liability for transfer duty must be considered. The following concepts are key elements: “acquisition”, “date of acquisition”, “fair value”, “property”, “residential property”, “residential property company” and “transaction”. The last of the concepts, being a “transaction”, requires special attention. What constitutes a “transaction” A “transaction” includes not only an acquisition by way of purchase, donation, exchange, or any other modes of acquisition, but also any act whereby the value of the property is enhanced through the renunciation of any other person’s interest in, or restriction upon, the use of or disposal of the property. Furthermore included in this definition are transactions involving the acquisition or renunciation of registrable personal servitudes. A positive personal servitude is where the owner of the land burdened by the servitude must allow the holder of the servitude to exercise some right or benefit over the land in question. Examples include rights of usufruct, habitation, usus, right of way, right to collect firewood, power line servitudes, etc. A negative personal servitude prohibits the landowner from exercising a right that is accepted as inherent in the ownership of the property. In other words, these types of servitudes amount to registrable restraints or veto rights, which prohibit the owner of the land from doing something which would usually be permissible. Examples include: prohibiting the owner from subdividing the land without the necessary consent; restricting the height of buildings or prohibiting more than one building to be erected on the land; and prohibiting the transfer of the land without the consent from the Home Owners’ Association etc. A negative personal servitude can be created in the deed of transfer if it can be enforced by some person who is mentioned in the servitude and that person has accepted the right. This is often applied in the case of the creation of restraints enforceable by Home Owners’ Associations. However, no separate creation or registration event is necessary where the restraint is created by statute such as, for example, by Municipal Ordinance. Property transactors should therefore be vigilant of any potential transfer duty costs in respect of their transactions as it could lead to an unintended transaction cost when not properly managed. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Primary residence exclusion: Things to look out for
The Eighth Schedule of the Income Tax Act, which deals with capital gain tax, allows for exclusion from liability on any gains realised on the sale by a taxpayer of a primary residence on the first R2 million of such gains. There are, however, several more complex matters that often arise in the determination of any gain, and we examine some of those in more detail below. How often do you qualify? There is no limit on the number of times a person can qualify for the exclusion of R2 million, even during the same year of assessment. It applies each time a primary residence is disposed of, and there is no lifetime limit. Thus, a person could qualify for more than one primary residence exclusion in a year of assessment if multiple primary residences were disposed of in that year. Apportionment of the primary residence exclusion when more than one person has an interest in a primary residence The gain threshold operates on a “per primary residence” basis and not on a “per person holding an interest in the primary residence” basis. This requirement means that when, for example, two individuals have an equal interest in the same primary residence, each of them will be entitled to a primary residence exclusion of a maximum of R1 million. In this example, they would also disregard any capital gain or loss if the proceeds on disposal of each person’s share were R1 million or less. This situation would typically apply to spouses married in community of property. When more than one person holds an interest in the same residence, the primary residence exclusion and the proceeds threshold are split only between those persons who occupy the residence as their primary residence. The interests of persons who do not reside in the residence as their primary residence are not taken into account. Only one residence at a time may be a primary residence of a person Only one residence may be a person’s primary residence for any period during which that person held more than one residence. This requirement means that there can never be an overlapping period when one person owns two residences and uses both as primary residences Size of residential property qualifying for exclusion The primary residence exclusion applies only to so much of the land that does not exceed two hectares. For land that exceeds two hectares, it will be necessary to determine the capital gain attributable to the two-hectare portion and apply the exclusion of R2 million against that portion. The land must be used mainly for domestic or private purposes together with the residence. Examples include land containing a swimming pool, tennis court or stables. Whether it is used ‘together’ with the residence is a question of fact. Depending on the facts of each case, there are several potential pitfalls in dealing with the primary residence exclusion, and homeowners are advised to engage professional assistance when dealing with such matters. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)