Must my residence be valued?
It is now almost three years since the introduction of capital gains tax (CGT) in South Africa, and it would appear that repercussions for the average property owner are causing increasing confusion in terms of valuation requirements.
The intention of this article is to answer five simple questions for you:
• Must I have my residential property valued?
• If so, why?
• By when?
• What are the valuation requirements?
• How do I go about it?
Must my property be valued?
Capital gains tax was introduced with effect from October 1st 2001, and in terms of CGT., any residential property owner is required to have the property officially valued as at that date. In the case of a primary residence the owner can retain the valuation certificate on file for future reference, but evaluations for all secondary residences – such as a holiday home – must be submitted to the South African Revenue Service (SARS).
If so, why?
Very simply, it is in the best interests of the owner of a primary residence or additional properties to arrange for this valuation, in order to set a base for future determination of your capital gains tax liability when required. Then, in the event of any future sale of the residence, or should the owner die, capital gain will be calculated as the difference between the base valuation as at October 1st 2001, and a new valuation conducted at the time of sale or death.
In the case of a primary residence, the owner will not be taxed on capital gains of up to R1-million. This applies when the owner is either a natural person or a special trust created for the benefit of an individual with a legally defined mental illness or serious physical disability.
Before proceeding any further, it is important to understand clearly what defines a primary residence and primary property.
As regards the residence, the individual concerned must:
• Own the residence
• Live in it
• Use it for domestic purposes
• Reduce the tax relief pro rata by any percentage of the residence used for office space.
As regards the property, it must:
• Not exceed two hectares
• Be used mainly for domestic or private purposes together with the residence
• Be disposed of at the same time and to the same person as the residence By when must the evaluation be completed?
The deadline for this valuation is September 30th 2004, and you need to have submitted any relevant valuation certificates to SARS by that date.
What are the valuation requirements?
Various guidelines and requirements for property evaluations have been stipulated by SARS. These include the following:
• Time Limit: Although the valuation has to be carried out by September 30th 2004, please bear in mind that the residence must be valued according to its condition and prevailing economic conditions as at October 1st 2001.
• Who may value: the Act does not prescribe this, and it is the responsibility of the taxpayer to appoint a professional and qualified person to handle the valuation.
• Method: Generally, the Act does not specify the methods to be used in performing evaluations, but there are some exceptions.
• Submission Requirements: Copies of evaluations must generally be lodged together with the relevant return of income for he year in which the asset disposed of.
However, certain evaluations must be lodged with the first return of income submitted after September 30th 2004, irrespective of whether the relevant assets have been disposed of or not.
• Substantiation of Valuation: The onus is on the taxpayer, and despite the fact that the valuation was done by a qualified and licensed valuer, the Commissioner can audit it and call for further documentation and information if required.
• Retention of Valuation Documents: All documentation pertaining to evaluations must be retained by the taxpayer for a period of four years after disposal of the asset.
• Improvements after October 1st 2001: In the event that you effect further improvements after this date, it is most important that you retain proper documentation of these costs, as they will increase your base cost for capital gains tax in the future.
• Valuation of a residential property should include:
• Valuers valuation, including basis of valuation and calculations.
• Physical address
• Size of property
• Details of improvements to property
• Plans of the property as at October 1st 2001
• Details of recent property sales in the same area
• Current municipal valuation of the property
• Any other information which may be relevant
How do I organize a valuation?
There is only one golden rule. You need to secure the services of a reputable, reliable, efficient and effective valuer. Our recommendation is that you seek guidance and advice from one of the following organizations:
• SA Institute of Valuers.
Tel: (012) 342-9056. or www.saiv.org.za
• The Estate Agency Affairs Board.
Tel: (011) 880-9994 or www.eaab.org.za
A final word….
Bear in mind that, if you choose not to obtain an acceptable valuation on your residence by September 30th 2004, one of two other methods will be used to determine your capitl gain, and the relevant tax: 20% of the proceeds (your selling price) will be deemed to be your base cost, or a time apportionment basis will be applied.
If you are a property owner, it really is in your best interests to take the plunge right now. Arrange for a proper valuation as at October 1st 2001 of your primary residence, and any other properties you won, and submit it/them before the rapidly approaching deadline arrives.
Also note that this article simply provides you with the basics involved in the valuation issue. There are many additional combinations and permutations which apply in certain cases and not in others. You will obviously obtain full details regarding your specific case from he valuer that you eventually select to act on your behalf.
CAPITAL GAINS TAX
Recently the topic of the day has been the introduction of Capital Gains Tax ("CGT") and its effect or impact, more specifically, on purchasers and sellers of immovable property.
The Taxation Laws Amendment Act of 2001 ("the Act"), which introduced CGT, primarily in an Eighth Schedule to the Income
Tax Act, was promulgated on the 20th of June 2001. CGT introduces a number of new concepts and the changes are of such import that Taxpayers will be well advised to consider the existing manners through which assets are held and the continued feasibility thereof.
In the past, homeowners, through an interest in entities such as Companies, Close Corporations or Trusts held their primary residences and now, since the enactment of CGT, have had to assess whether same is still feasible or appropriate to do so. It is therefore imperative that new purchasers, especially, carefully consider the most appropriate manner in which to acquire a new residence. Most Taxpayers will at one stage or another be faced with the acquisition and/or sale of their properties being used by them as their primary residence. The sale of these properties attracts CGT and it is therefore imperative that new purchasers, especially, carefully consider the most appropriate manner in which to acquire a new residence.
However, before making a hasty decision and changing the entity in which the primary residence is held, the Taxpayer needs to consult with a qualified tax consultant as there are other intricate factors involved such as estate planning measures which may have been the underlying reason same was done in the first place. A further factor to consider is the exposure or risk one may be exposed to when registering one’s primary residence in one’s personal name, especially businessmen whose personal assets may at some stage fall under attack from creditors.
PRIMARY RESIDENCE EXCLUSION
The sale of a property by a natural person which is used as his/her primary residence falls within the CGT net. Accordingly, upon
the sale of the property, and in the absence of the primary residence exclusion, CGT will be levied on 25% of the gain made by the Taxpayer upon the sale/disposal of his/her residence after the 1st of October 2001.
However, the legislator has provided some relief to Taxpayers in the form of an exclusion, generally known as the "primary residence exclusion". The aforesaid exclusion is only available to natural persons and special trusts (a special trust is a trust established in respect of the maintenance of a mentally or physically handicapped person -this topic is beyond the scope of this article), in respect of the disposal of a primary residence.
A "residence" means any structure which is used as a place of residence by natural persons and a "primary residence" means a residence:
– in which a natural person holds an interest (which includes any real or statutory right, shares in a share block company or similar entity and a right of use or occupation of a residence); and in which that person or a spouse of that person ordinarily lives or resides in as his/her main residence; and
– in which that person or a spouse of that person ordinarily resides or resided in as his or her main residence, and which is or was used for domestic purposes.
Unless the relevant property falls within the above definition of primary residence, the exclusion will not be available.
In terms of the exclusion, the first R1 million of the gain or loss upon the sale of a primary residence must be disregarded for CGT purposes. In its simplest form, it can be explained as follows: If a natural person owns a property with a "base cost” of R1,5 million and sells such property after the 1st of October 2001 for R3 million, a gain of R1,5 million will be realised, but the first R1 million thereof will be disregarded and accordingly only R500 000,00 of such gain will be taken into account when calculating the CGT payable. If the Taxpayer has made no further gains in the relevant year of assessment during which the property was sold (and had no losses), the Taxpayer’s net capital gain for that year would be included in his or her taxable income and taxed at the statutory rate applicable to that taxpayer.
It is furthermore important to note that:
– only one residence may be a primary residence of a Taxpayer for any period during which that Taxpayer holds an interest in more than one residence; ,00 exclusion upon the sale of the property.
It the Taxpayer or his or her spouse was not ordinarily resident in the primary residence during any period on or after the 1st of October 2001 up to the date of sale of the property, then the portion of the gain to which the primary residence exclusion would apply, would be reduced by such period. For example, if a gain of R1.5 million was realized, but the Taxpayer only used the property as his or her primary residence for 60% of the period under consideration, the primary residence exclusion would only apply to 60% of the gain, i.e. it would only apply to R900 000,00. On the balance of R600 000,00 CGT will be calculated as follows: R600 000,00 x 25% x 42% = R63 000,00 will be payable.
The legislator has, however, granted relief for certain periods of absence and in such circumstances no adjustment as discussed herein above will be made. The Taxpayer would still be able to make use of the R1 million exclusion in respect of the full gain on the disposal of the primary residence if he or she was absent for a period not exceeding two years for the following reasons:
1. the property was offered for sale and vacated due to an acquisition or intended acquisition of a new primary residence;
2. the residence was being erected on land acquired for that purpose;
3. the residence was accidentally rendered uninhabitable; or
4. the death of the Taxpayer.
Certain adjustments will also be made in the case of nonresidential use of a primary residence. Where the taxpayer has used the residence or part thereof for the purposes of carrying on a trade for any period of time, the portion of the capital gain to which the primary residence exclusion would apply, will be determined with reference to the period during which the primary residence was used as such, as well as the part of the residence used as such.
It is further advisable for Taxpayers to keep a record of expenses they incur in respect of their primary residence (to offset same against the gain), their use of the residence and any periods during which they are absent there from, all of which impact on the extent to which they can make use of the primary residence exemption.
Disclaimer: This article is for information purpose only and does not constitute legal advice. Call on our attorneys for legal advice, rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.