Tax Concession - Trust, Co or CC

Introduction
There was a time when there were advantages to owning property through a company or a close corporation. Instead of selling the property, one could sell the shares/members interest and loan accounts of the company or close corporation which would mean that the purchaser did not pay transfer duty. This resulted in the purchaser saving large amounts of money and accordingly one could either ask for a higher selling price or sell the “property” easier. However in 2002 legislation was passed in terms of which a company, close corporation or trust which owns residential immoveable property is treated as if it is immoveable property. This designation means that the sale of the trust or the shares or members interest and loan account in such company or close corporation is subject to payment of transfer duty calculated on the value of the immoveable property.

With the introduction of capital gains tax (CGT) in 2001 companies and close corporations were placed at a disadvantage in relation to individuals in that they could not claim the primary rebate (at present R1 500 000.00) provided to individuals on their primary residence. Further the effective rate for capital gains tax payable by a company or close corporation is higher than the rate payable by individuals.A further disadvantage is that when a company or close corporation disposes of its property and proceeds to distribute the profit to its shareholders or members, the company or close corporation pays secondary tax (STC) or dividends tax. Furthermore in terms of the Companies Act of 1973 an annual fee is paid by companies.

In light of the above the owning of residential property through a company or close corporation no longer makes sense. As a result of this more individuals wish to transfer their properties out of their companies into their own name. At present if a company or close corporation were to transfer a property to an individual it would be liable for CGT and STC or Dividends Tax and the individual purchasing the property would pay transfer duty. Now with the passing of the Taxation Laws Amendment Bill of 2009 individuals will from the 1st January 2010 for a period of two years be able to acquire property from their company, close corporation or trust without such entity paying STC or Dividends Tax or CGT. In addition, no transfer duty will be payable. Effectively the liability for the capital gains will roll over to the purchaser i.e. the base cost for the property will be what the base cost would have been for the seller. This will only be applicable when the purchaser sells the property and the purchaser will have the benefit of the primary residence exclusion.

How to qualify
To qualify the Bill requires the following:1. The property must be the sole asset of the company or close corporation or trust;2. The property must be a residence used exclusively for domestic purposes. Effectively the property must be your primary residence. Residence includes “any structure including a boat, caravan or mobile home which is used as a place of residence by a natural person, together with any appurtenance belonging thereto and enjoyed therewith”.3. An interest in a residence must be transferred from a company, close corporation or trust to a natural person.4. Shares or member’s interest must have been held directly by a natural person alone or together with his/her spouse or by a trust.5. Period – The company, close corporation or trust must have owned the property on or before 11 February 2009 and must distribute the property between 1 January 2010 and 31 December 2011.

Application of the Bill does not apply
The Bill will not apply where:1. The company has more than one shareholder or the close corporation has more than one member;2. The company or close corporation owns more than one property;3. Where the shareholder of a company is not a natural person or trust but a legal entity

Trusts as shareholders of company
Originally the Bill did not cater for residences owned by companies which in turn were owned by a trust. However the concession now also extends to trusts. Consequently the Act provides that a company which owns a residence and whose shares are held by a trust may distribute the property to the individuals who are the beneficiaries of the trust without adverse tax consequences.AdvantagesAt present a company or close corporation pays STC and CGT without any primary rebate and the purchaser pays transfer duty.
Now if the property qualifies for the concession the seller will have the benefit of not paying the following:

CGT – The seller will not pay CGT on the transfer of the property to the individual natural person. However the individual is not exempt from CGT. The CGT that would have been paid by company is effectively transferred and rolled over to the individual who takes the transfer of the property. Thus the individual will ultimately become liable to pay CGT on the sale of the property. However if the individual maintains the property as his/her primary residence he/she will now have the benefit of the primary rebate of R1 500 000.00 provided for CGT.

STC – On the sale of the property the company or close corporation would distribute the profits to its shareholders. Such award would constitute dividend for STC purposes. Under the amendment the individual will not be liable for STC.

Transfer Duty – Prior to the passing of the Bill the purchaser would be liable for transfer duty on the sale of the property. If the transfer of the property is done within the period there will be no transfer duty payable on the transaction.DisadvantagesAlthough the concession is very generous there is a disadvantage in respect of properties that are owned by trusts. Once the property is transferred into the beneficiaries own names their personal estate is increased which results in an increase of their estate for estate duty purposes thus undermining the objective of creating a trust.

Cost involved
The purchaser will still incur other ordinary costs of transfer such as conveyancing fees. Since there would be no purchase price the calculation of fees would likely to be based on the municipal value of the property. If the property was mortgaged to secure a loan the shareholder or member would need to discharge the loan and pay for the bond cancellation. The purchaser could apply for a new loan to be secured by the registering of a mortgage bond against the Title Deeds of the property. The cost of registering such bond would also be borne by the shareholder or member.

Information supplied by Dykes van Heerden, Attorneys
E-mail: info@dykedsvanheerden.co.za
Web: http://www.dykesvanheerden.co.za/