In the past people often held their homes in companies, close corporations and trusts, but the tax implications have changed dramatically since the introduction of capital gains tax in 2001.
Now a company and trust will pay capital gains tax on the profit on the sale of the property. A company will also pay secondary tax on companies when it distributes the profits to the owner. In addition, if a natural person buys the property, he or she will pay transfer duty on the value of the property.
After the introduction of capital gains tax, a limited window period was granted in which primary residences could be transferred out of a company or trust so that the owners could use the primary residence exclusion. Many people did not use that window period and for that reason another opportunity is now created.
The Taxation Amendment Bill B10 of 1 September 2009 proposes that from 11 February 2009 to 31 December 2011 a company* or trust may distribute a house to its only shareholder or beneficiary with no capital gains tax, secondary tax on companies, dividends tax or transfer duty being payable. (Paragraph 51 of the Eighth Schedule)
The conditions are:
1) that the person to whom the house is being transferred must be the only shareholder of the company or the only beneficiary of the trust; or be the only shareholder or beneficiary together with his or her spouse. Alternatively, the trust beneficiary must have donated the house to the trust or financed all of the expenditure relating to the house; and
2) that the individual alone or with his or her spouse personally and ordinarily resided in that residence and used it mainly for domestic purposes as his or her or their ordinary residence from 11 February 2009 to 31 December 2011.
3) the exemption will only apply to two hectares of the land on which the house is built.
Rollover relief will apply whereby the amount of the capital gains base cost of the house in the company or trust’s books will become the base cost of the house in the individual’s hands.
Please note that the bill is not enacted yet and may still change.
* The exemption will also apply to close corporations.
There is a serious defect in the provision insofar as its application to trusts is concerned. Unless this is corrected in the forthcoming Taxation Laws Amendment Bill, its application to trusts will be extremely narrow. Taxpayer should aware of this and not rush into transferring their property out of a trust unless they have received sound advice from a reliable source.