Major concessions for properties trapped in legal entities

14 Feb 2011

Major concessions for properties trapped in legal entities

Current tax law provides for a concession for the transfer of a residence from a company,
close corporation or trust to an individual without incurring tax liabilities, such as secondary tax
on companies (stc), capital gains tax (cgt) and transfer duty. The concession was intended to
run until 31 December 2011 but was replaced by a new dispensation from 30 September
2010. We hope to give more clarity for our readers about the way forward.
Previously, an individual (or in conjunction with their spouse) had to directly hold all the shares
in the company that was transferring the property. Alternatively they must have donated or financed
the acquisition of the residence held by a trust.
The taxpayer must have personally and ordinarily resided 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.
In practice, the unnecessary restrictions of the old regime 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 it was required that he or she hold the
shares directly in the company.
Now, the new rules apply to residents that are ‘connected persons' in relation to the company
or trust. In our view this change in wording will facilitate the transfer of a residence in instances
where a family trust holds the shares in the company that in turns holds the property. It provides
a far greater application than the previous regime.
An important difference is the reference to a residence that is mainly used for ‘domestic purposes'.
In other words, the residence being transferred no longer has to be the taxpayer's primary
residence. The words ‘domestic purposes' will allow, for example a holiday home
(provided that it is not rented out more than 50% of the time) to be transferred to the individual.
It must be emphasised that in order 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.

Similarly in the case of a trust, the revocation of that trust must occur within six months. This
revocation will require written agreement between the founder, trustees and beneficiaries. Alternatively,
an application for revocation must be made to a court. The latter instance would for
example occur where the founder is already deceased.
The overall effect of the concession is that any taxpayers who have not yet taken advantage of
the current concession, have now been provided with a new and far more flexible relief against
the ordinarily associated consequences of STC, CGT and transfer duty.

Source:
realestateweb (adapted)