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)
Who qualifies for a special trust and how is it taxed?
Unlike “conventional trusts” that are taxed at a flat tax rate, a special trust is taxed on the same sliding scale applicable to natural persons. The Income Tax Act provides for two types of special trusts: a so-called type-A and type-B trust. In essence, a type-A trust is created for a person (or persons) having a disability, while a type-B trust is created on a testator’s death and can exist only while it has a minor as a beneficiary. The distinction between a type-A trust and a type-B trust is vital because a type-A trust qualifies for specific relief from capital gains tax but the same is not granted to a type-B trust. This article focuses on the characterises of a trust in order for it to qualify as a type-A trust. Characteristics of a type-A trust A type-A trust can either be: an inter vivos trust created during the lifetime of the founder of the trust; a testamentary trust created by, or under, the will of a deceased person (testator); or a trust created as a result of a court order in favour of a specified natural person. Type A special trusts must have the following characteristics to qualify for the favourable tax dispensation: The trust must be created solely for the benefit of one or more persons with a disability. In essence, this means that the trust deed must not provide for the possibility of any beneficiary who does not have a “disability” for as long as the person(s) with a disability is or are alive. For a trust to be a type-A trust, its beneficiaries must be incapacitated as a result of their disabilities from – earning sufficient income for their maintenance; or managing their own financial affairs. It is a requirement that at least one of the beneficiaries, for whose sole benefit the trust was created, should be alive on the last day of February of the relevant year of assessment of the trust. A trust will accordingly cease to be a type-A trust from the commencement of the year of assessment during which all the beneficiaries with a disability for whose sole benefit the trust was created, are deceased. A trust that is created solely for the benefit of more than one person with a disability must be for the benefit of persons with a disability who are each other’s relatives. The relationship between the founder or settlor and the beneficiaries is of no consequence. The requirement is that the beneficiaries having a disability must be relatives, not the founder or settlor. Accordingly, The relationship between the beneficiaries and founder or settlor has no impact on whether a trust qualifies as a type-A trust. It is important that where persons of disability are reliant on trust income to support their livelihood, these requirements be carefully considered and that the trust is correctly registered as a type-A trust with the South African Revenue Service. Should you require assistance in this regard, feel free to contact your tax adviser for more detail. 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)
Budget 2021: Corporate tax amendments
Finance Minister Tito Mboweni delivered his third annual budget address on 24 February 2021. The corporate tax rate reduction from 28% to 27% for years of assessment commencing on or after 1 April 2022 was arguably the most significant windfall for corporate taxpayers, although the actual cash benefits thereof will only be seen in the 2023 calendar year. Below, we highlight some of the other significant proposals, which will likely be contained in the Draft Taxation Laws Amendment Bill to be published for public comment in June or July this year. Refining the interaction between anti‐value shifting rules and corporate reorganisation rules The Income Tax Act curbs the use of structures that shift value between taxpayers free of tax. The anti-value shifting rules apply to transactions involving asset‐for‐share exchanges. Asset‐for‐shares base cost rules prescribe that a base cost for assets acquired by a company in exchange for its shares should be equal to the sum of the market value of the shares it issued and the amount of the capital gain triggered by the application of the anti‐value shifting rule to ensure that there is no double taxation on the future disposal of the assets. Clarifying the interaction between early disposal anti‐avoidance rules and de‐grouping anti‐avoidance rules in intra‐group transactions In addition to the early disposal anti‐avoidance rules outlined above, the intra‐group transaction rules contain de‐grouping anti‐avoidance rules, which apply when the acquirer and the party disposing of an asset in terms of an intra‐group transaction cease to form part of the same group of companies within six years of the transaction. The de‐grouping anti‐avoidance rules apply to reverse the tax benefit that was obtained in terms of the intra‐group transaction by triggering the greatest capital gain, gross income, or taxable income that would have arisen between the date of the intra‐group transaction and the date of de‐grouping. Because both of these anti‐avoidance rules apply to reverse the deferred tax benefit of an intra‐group transaction, it is proposed that changes be made to the tax legislation so that if one of the anti‐avoidance rules applies in respect of an asset, the other will not subsequently apply. Reviewing the venture capital company tax incentive regime National Treasury has determined that the incentive has not adequately achieved its objectives. The incentive has instead provided a generous tax deduction to wealthy taxpayers and most support has gone to low-risk ventures that would have attracted funding without the incentive. The incentive will therefore not be extended beyond its current sunset date of 30 June 2021. 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)