Your tax accountant in your newly adopted country was horrified to learn about the house/ property owned by your South African trust? It gets even more complicated if the property is registered in a close corporation (CC)/ company which is owned by that trust.
Have you been stung by the not-so-friendly double tax agreements, which allow you to be taxed on the rental income in two countries but denies you any tax credit?
Historically, some individuals acquired their residence in a company, CC or trust, primarily to avoid transfer duty and ultimately, one day, estate duty. You now live in a new country where estate duty is much less of a concern and the current layered corporate structure in South Africa is now probably no longer worth retaining.
Worst is, from an international tax point of view, you probably regret having set up the South African trust structure which in the current property market globally, does not really allow you to sell off and unwind this now seemingly inappropriate structure.
With recent developments in South Africa and the introduction of new corporate rules, the former close corporation is now treated very much like a private company held by closely linked individuals. The question is, do you convert the CC, close the trust or just leave all as is?
A concession has been enacted by the South African Revenue Services that allows for the tax-free transfer of a residence from a company or trust into the hands of shareholders or beneficiaries of the company or trust who are natural persons. Where the concession applies, the transfer is free from CGT, dividend tax and transfer duty. The entity or entities (in a multi-tier structure) out of which the residence is transferred must however be revoked, de-registered or liquidated.
The main requirements for the application of the concession are that the residence must be:
- mainly used for domestic purposes during the period from 11 February 2009 to the date of disposal;
- by one or more natural persons who are connected persons in relation to the company or trust that owns the residence:
- in simple English: a shareholder holding of 20% or more of the shares in a company is a connected person in relation to the company;
- any member of a CC is a connected person in relation to a CC;
- any beneficiary of a trust is a connected person in relation to the trust; and
- where a CC is trust owned, a connected party to the trust is a connected party to the CC yet not always a connected party to all companies owned by the trust. To be connected to a company the trust beneficiary should effectively be a 20% indirect shareholder of the company, once the trust layer is ignored.
- the residence must be disposed of on or before 31 December 2012
South Africans living abroad should understand that they need to obtain advice from a tax specialist, an attorney or other registered advisor to understand not only the benefits, but also to ensure that they truly meet the requirements for the relief, prior to them incurring any professional fees. It is also advised that you properly understand both the South African tax implications and exchange control requirements as well as the relevant tax position in your newly adopted country.
In terms of South African tax law, the qualifying connected member/shareholder/beneficiary or transferee, effectively "takes over" the property at the original base cost of the residence. In this case it is either the 2001 valuation price, or the time apportioned base cost plus the cost of improvements and the associate cost of disposal, be it a fresh valuation or cost to sub-divide.
There are many pitfalls that one should however consider, such as donations tax, the fact that you are a tax non-resident and CGT withholding taxes may apply to property held in your personal name.
The lawyers' fees or conveyance and mortgage cancellation and registration fees remains due and payable at the current market value. The existing mortgage bond may be passed on, yet it is important that approval of the bond in the name of the new owner's name be approved prior to 31 December 2012 as the transaction or agreement needs to final and binding by 31 December 2012.
What do you do should you be interested to explore this opportunity? Contact us at www.cashkows.com/ or send us an email to firstname.lastname@example.org.