Residential Property Tax Window Widened

The introduction of a two-year property ‘tax window’ by SARS (the South African Revenue Service) has been brought forward from 1 January 2010 and will now apply retrospectively to disposals from 11 February 2009. The window period will last for transfers up until 31 December 2011. During this “tax window” period people who hold their primary residences in CCs or private companies can transfer their properties into an individual’s name without incurring any liability for capital gains tax (CGT).

“Although the original proposal was met with considerable enthusiasm many taxpayers were disappointed to discover that their personal circumstances did not fall within the parameters of the proposed relief,” says Kemp Munnik, a tax director at auditing and accounting firm BDO.

Property owners who maintain an office or studio at home, rent a garden flat or those who innocently take in a paying visitor over the FIFA World Cup would have been disqualified from the property tax relief prior to the latest changes.

The relief has however now been extended to include property used mainly for domestic purposes rather than the very restrictive provision that one's residence must be used exclusively for domestic purposes.

Munnik says once the property is in an individual's name, not only would the effective tax rate be lower, but also there is relief or partial CGT (capital gains tax) CGT relief upon disposal of a primary residence held by an individual.

“Although, the residential property window has been widened it is protected by some fairly sturdy burglar guards,” says Munnik. “For example, the relief has been extended to residential property held in trust but would not apply, for instance, to a residential property held in a company which is, in turn, held by a family trust. Also, the window would only apply to a residence donated to a trust by the resident or if the acquisition of the property was financed by the resident. There would thus be no relief for residential property held in trust where, for example, the trust raises a bond to finance the acquisition of the property and services the bond out of its own means,” says Munnik.

The legislation refers to a person's ‘ordinary residence', a terminology that is not defined. In the Explanatory Memorandum that was issued with the draft bill, it is explained that this relief is similar to the relief that was offered when capital gains tax was introduced to allow individuals who held their primary residences in companies or trusts to transfer such properties into their names without having to pay relevant taxes. Properties that were not used as an ‘ordinary residence' (e.g. a holiday home or vacant plot) will not qualify for the relief.

Munnik says that the residential property need no longer be a company's sole asset nor will it be necessary to liquidate the company after the disposal of the property.

“Taxpayers are cautioned that this is still a bill and from a tax perspective, it is preferable to wait for enactment,” advises Munnik.