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Company owned homes There was a time when there were advantages in owning a home through a company. Some estate agents motivated the purchase of a home in a company on the grounds that on a resale, the shares and loan accounts in the company could be sold instead of the property and thereby the obligation to pay transfer duty could be avoided. The introduction of CGT in 2001 was the first step towards making ownership of a home in a company unattractive. Upon the disposal by a company of a property, the primary rebate of R1 500 000,00 could not be claimed and the rate of income tax payable by a company was higher than the rate payable by a natural person. With STC being payable on the declaration of dividends arising from the disposal by a company of a property, the ownership of a home through a company became less attractive. A mortal blow was the designation in 2002 of a home-owning company as a “residential property company” which rendered the sale of shares and loan accounts in such a company subject to the payment of transfer duty. A further disincentive will be that in 2010 an annual fee will be required to be paid by companies as the intention is to reduce the number of inactive companies. At the time of introduction of CGT, an opportunity was afforded by SARS for a shareholder to take transfer from a company of the property comprising the home without the payment of transfer duty or CGT. Many took advantage of the opportunity. Others did not. Those who did not will soon have a second opportunity to extract their homes from residential property companies. The difference this time is that the shareholder will not escape CGT as it will be deferred or rolled over and not avoided. However no transfer duty or STC will be payable. To qualify, the Taxation Laws Amendment Bill stipulates that the shares in the “domestic residence company” must on the 11th February 2009 have been held directly by a natural person alone or together with the spouse of the natural person. The sole asset of the company must be a residence used exclusively for domestic purposes. The company must make a distribution in specie of the property to the shareholder between the 1st January 2010 and the 31st December 2011 in anticipation of the winding-up or deregistration of the company. The company will be deemed to have disposed of the property for an amount equal to the base cost of the property on the date of disposal. On the resale of the property by the shareholder, the base cost for the purpose of calculating a capital gain or loss will be the original cost of acquisition of the property by the company plus any expenditure allowable in terms of CGT legislation. However the shareholder will be entitled to the primary rebate which in effect has been increased to R2 000 000.00. As the shareholder will have held the equity in the company, the shareholder’s potential liability for estate duty will be unchanged. This second opportunity afforded by the Government will not apply where the company has more than one shareholder, the company has more than one property or where the shareholder is not a natural person but a legal entity or a family trust. The opportunity will however be available to a close corporation which has one member and which owns a domestic residence. If the property has been mortgaged to secure a loan, the shareholder will need to discharge the loan or apply for a new loan to be secured by the registration of a mortgage bond against the Title Deeds of the property. The shareholder will incur the cost of registering the mortgage bond in addition to the conveyancing costs pertaining to the transfer of the property. As there will be no purchase price, conveyancers are likely to base the calculation of their fees on the municipal value of the property. Shareholders of company owned homes should not miss this opportunity and should consult their conveyancers early in the new year. Roger Green rgreen@coxyeats.co.za Company owned homes II An amended Taxation Laws Amendment Bill was published by SARS on the 1st September 2009. This version of the Bill in some respects changes the original proposal on which I commented in an earlier note – Company owned homes. That note should be read in conjunction with this update. The amended section of the Bill has been widened to include the transfer of a home from a trust to a beneficiary of that trust if the beneficiary had contributed to the cost of acquisition and maintenance of the home and the beneficiary and spouse have resided in that home. Although the Bill is still to be approved and promulgated, the new section is deemed already to be in operation. Accordingly a company or trust which qualifies may immediately divest a residence to a shareholder or beneficiary. The Bill no longer requires the divestment of a “domestic residence” but instead an “interest in a residence”. The concession is not limited to what would be defined as a primary residence. However the natural person or spouse who wishes to acquire transfer must personally have resided in the residence from the 11th February 2009 to the date of transfer. Therefore a tenanted property would not qualify. A holiday home in which the shareholder “ordinarily resided” might qualify. The residence must be situate on land which is less than 2 hectares in extent. The primary benefit of divesting a qualifying company or trust of its immovable property is that CGT will be payable at a lower rate and will be deferred until the subsequent disposal of the property by the shareholder or beneficiary. At the date of disposal, CGT will be calculated on the gain accruing from the date of acquisition or 2001, whichever is the later, but at individual rates. In addition the primary residence exemption may apply. The distribution of the property will remain exempt from STC and transfer duty. The benefit of the new section to a trust is likely to be advantageous primarily to a vesting trust with a sole beneficiary. The retention of a residence in a discretionary trust may continue to provide estate planning benefits if the beneficiary has a potential estate duty liability. If estate duty is not a factor then divestment of the property to the beneficiary would be advantageous because of the reduced rate of CGT and the possible benefit of the primary residence exemption. A natural person who is a shareholder of a company or a beneficiary of a trust which owns a domestic residence should consult his or her legal advisor to ascertain whether the provisions in the Bill are applicable to the residence and whether it would be beneficial to take transfer of the residence from the company or trust. In most cases it will make sense to transfer a residence from a company to its shareholder. Roger Green CW MALAN EXAMPLE OF FEES. Homes valued at reasonable market value and not inflated Municipal Values. This concession is valid for people who have lived in said property on a permanent basis since February 2009. Speak to your Attorney to find out if Holiday Homes apply, there may be a way around it. There are huge advantages in moving the property into your personal name rather than a Company or CC. Capital gains for individuals is 10% (you also get a rebate for using the house as a primary residence), whereas capital gains for Companies and CCs is a total of 22%. |
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