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PROPERTY TAX GAP ACT KICKS IN - ACT NOW!
The final version of the new tax break legislation for homeowners has come into effect.
What's it all about?
If you hold your home in the name of a company, close corporation or trust, you may be one of the lucky ones who can now take advantage of the opportunity to transfer it - free of tax - into your own name.
Why would I do that?
There is potentially a huge Capital Gains tax advantage to holding your primary residence in your personal name (or indeed in the name of any other qualifying individual).
Firstly, when you come to sell the property down the line, you will pay substantially less Capital Gains Tax as an individual, in three respects: - - The first R1.5m of the capital gain on a "primary residence" is exempted from Capital Gains tax (a full exemption applies to properties sold for up to R2m), and
- The balance of the capital gain will be subject to CGT at a maximum effective rate of only 10% (much less than the fixed 14% for a company/CC, or the 20% for a trust), and
- An "annual exclusion" of R17.500 (R120.000 on death) applies (i.e. any capital gain up to that amount is tax-free for individuals).
Then (and this again is a cost which the private individual avoids), if you want to take the proceeds out of your company or CC, you must also pay a second tax - STC ("secondary tax on companies").
How much tax could I save?
To illustrate - if you bought your house for R1m and in the future sell it for R3m (i.e. a R2m capital gain) -- An individual (or special trust) will pay (at most - it could be much less if your marginal tax rate is low) R50.000 CGT,
- A company or CC will pay up to R426.363 (a flat R280,000 for CGT plus R156.363 for STC),
- A trust will pay R400.000 CGT. (Note that you may be able to reduce this by having the proceeds taxed in the hands of the beneficiaries. Also in some cases, estate-planning considerations make retention of the property in the trust the better option - take full advice in doubt, as new estate duty deductions come into effect next year).
Do I qualify?
Unfortunately, not everyone stands to benefit. The qualifiers for tax-free transfers, and the parameters for CGT relief thereafter, are not as simple as some media reports have suggested, and you should take advice on your specific circumstances. This list of factors is not exhaustive, but it will give you an idea of where you stand: -- The property must have been owned by the company, CC or trust since 11 February 2009, and must be -
- Used mainly for "domestic purposes" (the word "mainly" implies that you may be able to safely run a home office, or rent out a room to a soccer fan next year; but there are grey areas here, so take advice before you do so),
- The "ordinary residence" (since 11 February 2009) of you or your spouse; so, for example, buy-to-let properties and holiday houses will not qualify,
- No more than 2 hectares in extent.
- With a company or CC, the shares or member's interests must be held by individuals (so if the shareholder is a trust, there is no relief).
- With a trust, the person taking transfer must have donated the house to the trust or funded its acquisition, improvement, maintenance, and payment of bond instalments (if any).
What if the property is bonded?
If the property is bonded, first check the following with your bank (and factor in whatever costs may result - although they are likely to be nominal in relation to the potential tax saving): -- Although in theory your bank could possibly agree to substitute you for your entity, it seems more likely that it will instead insist on registration of an entirely new bond - find out which will apply in your case. In any event, now is the perfect time to take out an increased bond if you would like to do so.
- Will it re-assess your loan? If so, will you qualify (as you will have to) in terms of the National Credit Act?
- Will you get the same interest rate as applies now?
- Do you need to give notice on the bond? Often penalties kick in if you give less than 3 months' notice.
Anything else?
If you originally put your property into a separate entity to insulate it from business or other risks (usually protection from creditors), re-assess the current risk in relation to both these tax and other savings. Most importantly, take full advice in doubt!
Although you have until the end of 2011 to effect transfer, procrastination could find you inadvertently disqualifying yourself from taking advantage of this opportunity, and/or leaving it too late, not to mention the immediate saving of the audit and administration costs that go with running an artificial entity.
Be aware also that transfer could be delayed by factors such as SARS' assessment procedures, by the 3-month's notice to your bondholder and approval of a new bond (if applicable), and by the need to obtain rates clearance certificates.
Deadlines come and go quickly - take legal advice on this now!
ARRESTING THE FUGITIVE DEBTOR: RISK AND REWARD
You learn that your debtor is about to skip the country, leaving you to pursue your claim in a foreign court - an expensive and inconvenient alternative at the best of times. What can you do?
Our law provides a drastic remedy, with a suitably impressive and ominous Latin name: "Arrest tanquam suspectus de fuga". In a nutshell, a court may in appropriate circumstances order your debtor to be arrested and detained until he/she pays the debt or provides sufficient security for it.
The High Court recently expressed strong doubts as to whether this "draconian" remedy, with its violation of personal freedom, will pass Constitutional muster. However the Court did not have to make a definitive pronouncement in that regard, as it found that in any event the creditor had failed to prove that the debtor was departing the country with the intention "to evade or delay payment".
Critically, it is the intention of the departure that is relevant, not the effect. So the fact that the debtor had made substantial preparations to return to his home country was not a deciding factor - it was an "already planned innocent departure", and arrest could not therefore be justified.
What you have available to you here is of course a very powerful weapon, and your reward for using it correctly could well be full payment. But it has its risks - if you fail (a particular danger in view of the Constitutional challenges likely to be levelled at the procedure's core validity) you might face a substantial damages claim in addition to a lot of legal costs. Tread carefully!
YOUR DOMAIN NAME - USE IT OR LOSE IT!
Be aware of the dangers of registering an Internet domain name and then not actually using it.
A recent domain name dispute concerned two businesses which both had a long history of using - and acquiring rights to - the name "Garden Master"; one business in relation to gardening tools and fertilisers, and the other in relation to gardening services. Despite the fact that the services business had the prior rights (a full 30 years before the tools business registered the name as a trademark), its registration in 2007 of the domain name www.gardenmaster.co.za was reversed by the Adjudicator in favour of the complainant.
A key factor behind the decision was that the registrant had not made any actual use of the domain name, having registered it because "our company name had to be protected". However, held the Adjudicator: "The purpose of a domain registration is not to protect rights - the purpose is to enable e-commerce".
Non-use of a domain name will not automatically be fatal - that will depend on the facts in each case. Thus the decision in this dispute rested at least in part on other factors peculiar to it - the registrant had acquiesced in the other business using the trading name in its own sphere of operation, it had offered to part with the domain name for "consideration in excess of its out-of-pocket expenses", and it failed to tender any explanation for its non-use of the domain name.
But why take the chance? Don't just sit on your domain name - use it!
DOCTOR'S ORDERS: THE DUTY, AND THE DANGER
How far may doctors go in delegating responsibility for the treatment of their patients to the patients themselves?
This question arose in the High Court recently, where the parents of a child born with Down's syndrome sued for damages from the hospital and clinic that attended to the pregnancy. The hospital/clinic staff were found to have been "grossly negligent" in failing to ascertain at an early stage of the pregnancy that the foetus suffered from a genetic abnormality.
In finding further that the mother was herself not guilty of any "contributory negligence" in failing to follow the doctor's instruction to return for a follow-up ultrasound scan after the first had raised a "red flag" (she had instead followed the contradictory advice from a nurse at the clinic that no second scan was needed), the Court discussed some of the principles applicable - - Patients themselves must often be responsible for "the performance of some part of the treatment or cure";
- However, a doctor has a "special duty towards the patient to give clear and unambiguous instructions, to explain to the patient in intelligible terms what is required of him and to give him any warning which may be necessary in the circumstances". In this case, the doctor should have
- Informed the mother "in detail of the risks she faced and precisely what the effect was of the inconclusive scan and the absolute necessity of having an urgent re-scan", and
- Issued a "written instruction to the clinic to make it absolutely clear that the [mother] was required to return".
EXCHANGE CONTROL LIMITS TO INCREASE
The Finance Minister has announced plans to relax exchange controls - highlights are substantial increases in the foreign capital allowance for individuals (R2m to R4m), and in the offshore investment allowance for businesses (R50m to R500m), plus a range of measures to reduce the associated red tape.
THE NOVEMBER WEBSITES: ESCAPING ESKOM'S ESCALATIONS
One way or another, electricity is going to cost us a whole lot more - soon.
The media is full of tips on how to reduce your power bill, but the only way to actually get started is to do something practical now.
Get off to a running start - print out the "DIY Home Recovery Plan" and the "Business Recovery Checklist" on the National Energy Efficiency Campaign website at www.savingenergy.co.za.
Prioritise your resulting action list as follows: -- Reduce consumption (just sorting out your geyser will reduce costs hugely in most homes).
- Consider alternative energy sources to meet your newly-reduced needs. Solar and wind energy are becoming mainstream, and Eskom will help you on the solar energy side with
- DIY enthusiasts should google for on-line guides like Agree.Net's " Do-It-Yourself Hot Water Guide" at http://www.agreenet.info/documents/DIY%20hot%20water.pdf.
Enjoy November!
Note: Copyright in this publication and its contents vests in LawDotNews(law.news)
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