It is proposed that until 31 December 2012, companies whose sole asset is a domestic residence and whose shareholders are the individuals that use that domestic residence as their home will be able to distribute the domestic residence to the shareholders with no CGT, transfer duty and STC becoming payable.
Prior to 2002, many people used private companies and close corporations as vehicles to purchase their homes. At the time, the purchase of the shares in a company or the interest in a close corporation owning a domestic residence was not subject to transfer duty.
With the amendments to the Transfer Duty Act, 40 of 1949, in 2002, to make transfer duty applicable to such transactions and the introduction of Capital Gain Tax (“CGT”) in 2001, all of the tax benefits of these structures have disappeared. In fact, currently, for an individual taxpayer to acquire ownership of their home that is owned by a domestic residence company, they will not only incur transfer duty for the transfer of the property into their name but the domestic residence company will also be subject to CGT on the disposal of the house to the individual, as well as Secondary Tax on Companies (“STC”) on the distribution of the house to the shareholder.
The Draft Taxation Amendment Bill, 2009, proposes certain exemptions which will allow domestic residence companies to distribute the domestic residences which they own to their shareholders free of CGT, transfer duty and STC.
It is proposed that for a limited period only, companies whose sole asset is a domestic residence and whose shareholders are the individuals that use that domestic residence as their home will be able to distribute the domestic residence to the shareholders with no CGT, transfer duty and STC becoming payable.
SARS hopes that this concession, together with the annual fee payable to the Registrar of Companies, as per the Companies Act, 61 of 1973 will encourage taxpayers to liquidate, wind up or deregister these companies, effectively cleansing the Register of Companies of inactive and dormant companies.
For CGT purposes, the exemption will operate to deem the domestic residence to be distributed by the domestic residence company to the shareholder at its base cost and therefore avoiding a capital gain or loss in the hands of the company. The shareholder will step into the shoes of the domestic residence company and the date of acquisition and any valuation previously performed on the domestic residence will be taken over by the shareholder.
A special exemption will be inserted into the Transfer Duty Act, to cater for the transfer of the domestic residence by the domestic residence company to the shareholder. Similarly, the provisions of STC will be amended to exempt from STC, the dividend in specie declared by a domestic residence company to an individual shareholder in anticipation of or in the course of the company’s liquidation, winding up or deregistration.
These concessions will come into operation on 1 January 2010 and will apply to distributions made on or after that date but no later than 31 December 2012.