Holiday pad tax break

2010-10-07 00:00

CURRENT tax law provides for a concession for the transfer of a residence from a company, close corporation or trust to an individual without tax liabilities such as secondary tax on companies, capital gains tax and transfer duty.

The concession was intended to run until December 31, 2011, but will be replaced by a new dispensation that applies from the end of September.

Although there are changes, taxpayers should welcome the new concession as it provides far greater flexibility, explains Dylan Buttrick, tax specialist at Mazars.

Previously, a person (either as an individual or with a spouse) had to hold all the shares directly in the company that was transferring the property. Alternatively, he or she must have donated or financed the residence held by a trust.

The taxpayer must have personally lived on a daily basis in the residence being transferred.

“This legal jargon effectively resulted in the requirement that property being transferred must be the primary residence of the individual concerned,” says Buttrick.

The unnecessary restrictions of the old law were quickly identified. For example, where a family trust owned a company, which in turn held the residence, the individual would not be able to make use of this tax concession as he or she was required to hold the shares directly in the company.

This was counter-productive to the government’s aim of removing unnecessary entities from the company register and to simplify the administration and enforcement of the law, Buttrick says.

The new rules apply to residents who are “connected persons” in relation to the company or trust.

An important difference is the reference to a residence mainly used for “domestic purposes”. In other words, the residence being transferred now no longer has to be the taxpayer’s primary residence.

This means that “domestic purposes” now also allows a holiday home (as long as it is not rented out more than 50% of the time) to be transferred to the individual.

“Under the old regime, many of our clients were frustrated that the legislation didn’t permit them to transfer their holiday homes. This change is a response to such criticisms.”

Buttrick says it must be noted that to achieve the objective of cleaning up the company register, this new relief requires the company transferring the property to be liquidated or deregistered within six months. For a trust, the revocation of that trust must occur within six months.

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