Company home owners urged to use tax window

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 26 August 2009

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Company home owners urged to use tax window

The South African Revenue Service recently proposed the introduction of a two-year tax window from January 1, 2010, during which people who hold their primary residences in close corporations or private companies can transfer the properties to an individual's name without incurring any liability for capital gains tax (CGT), dividend tax or transfer duty.

The potential tax savings, even on a relatively modest home, can run to well over R250 000, says Kemp Munnik, director of the tax services division at audit firm BDO Spencer Steward. When CGT was first introduced in October, 2001, a limited window period was granted, but many people failed to take advantage of it.

The reason, says Munnik, was that at that time unless you lived in a fabulously opulent home, you probably did not give much thought to capital gains tax, especially as the first R1.5 million of gains on the sale of your home was exempt from this tax in your personal capacity.

But circumstances have since changed and property valuations have risen sharply, and Sars hopes that this time round more people will take up the offer.

Suppose you owned a property worth R1m when CGT was introduced in October, 2001. Given the rises in property values since then, it is not inconceivable that the same property would now be worth R3m.

If you sold the property today, and it was owned in your personal capacity, the R2m profit would have given rise to a 10 percent CGT charge on the R0.5m (over the R1.5m exemption) for a bill of R50 000.

However, if the same property which had been occupied by you and your family was still owned by a corporate entity, the entity would have to pay R280 000 to Sars in the form of 14 percent CGT (double that charged individuals). It doesn't stop there, says Munnik.

The profit of R1.72m would not actually be yours - it would belong to the corporate entity. The only way to access this capital would be by declaring a dividend.

There is another 10 percent secondary tax on companies charge (soon to be replaced by a 10 percent dividends tax) resulting in a further charge of R156 363, for a total tax bill of R426 363.

Compare this to the R50 000 paid by an individual. Of course, the prospective sellers must use the tax window and seek advice. Corporate tax charge only becomes liable when the property is sold out of the corporate entity, and this may never happen - it can continue to be sold within the company.

However, Sars is keen to reduce the number of unnecessary companies registered, and a Sars explanatory memo relating to the domestic property window period ominously warns that a Companies Act annual fee will be required to be paid by all companies to reduce the number of inactive and dormant companies.

In addition, it is highly likely that a future buyer will insist on the property being sold into his own name - for tax or mortgage bond application purposes and such a buyer may seek a reduction in the price to take account of the STC liability that he will effectively take over, says Munnik.

There may also be cases in times such as these where a home has to be sold under distressed circumstances, and its ownership by a corporate entity may be an additional hurdle - the case of a forced sale.

Corporate ownership of a house used to be an attractive selling proposition to avoid transfer duty, but those advantages are long gone, and, except for holistic estate planning purposes, for which a trust is more advantageous as the ownership vehicle, the practice is an anachronism.

Munnik says: "We advise people to take advantage of this window. But more importantly, to do it properly and seek professional advice."

"There are mistakes that can be made in transfer that could aggravate the problem. Also, we suggest that anyone already contemplating the sale of a corporate-owned home should postpone the sale if they can, and first take advantage of the tax window to get it into their personal name."

"It is far more preferable for an investor in immovable property to acquire the property directly, ensuring that the rate of tax intimately payable will be that much lower." Munnik says although the tax window is aimed at helping owners of lower- and mid-range homes, the same principle applies in the case of rich people.

However, he cautions that for them the matter needs more attention as part of estate planning, depending on the overall structure of their assets.

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 26 August 2009