If a husband sells a rental property to his wife to generate income, does this constitute a CGT transaction of a donation? The husband needs to finance a venture, but do not qualify for a personal loan. The wife, however, will qualify for a bond on the re
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
Disposals of assets between spouses is dealt with in paragraph 67 of the Eighth Schedule to the Income Tax Act. The paragraph essentially provides ‘roll-over relief' in respect of the assets disposed of by one spouse to the other spouse. With respect to a transfer of asset between spouses, it allows the person (transferor) to disregard any capital gain/loss calculated on the disposal of any asset to his or her spouse (transferee). Further, the transferee will be treated as having acquired the asset on the same date as the transferor for an amount of expenditure contemplated in paragraph 20, as incurred by the transferor at the same date that it was incurred by the transferor – basically, the history associated with the asset will be transferred.
The rollover relief will not apply if the spouse to whom the asset is transferred is not a SA resident, other than in respect of the disposal of an asset by a person to his or her spouse who is not a resident, where the asset disposed of is an asset contemplated in paragraph 2(1)(b) (i.e. immoveable property or a right thereto or any asset attributable to a permanent establishment in SA).
Because the spouses are connected persons in relation to each other, the fact that the transaction is at a value below market value is really irrelevant.
The disposal of the asset to the spouse under these circumstances could well be ‘any gratuitous disposal of property’ (as envisaged in section 55 of the Income Tax Act. A donation would therefore arise, but in terms of section 56(1)(a) and (b) no donations tax is payable in respect of the value of any property which is disposed of under a donation—
(a) to or for the benefit of the spouse of the donor under a duly registered ante-nuptial or post-nuptial contract or under a notarial contract entered into as contemplated in section 21 of the Matrimonial Property Act, 1984 (Act 88 of 1984);
(b) to or for the benefit of the spouse of the donor who is not separated from him under a judicial order or notarial deed of separation …
We need to comment on the statement that it was done ‘to generate income’ for his spouse. Remember that under section 7(2) of the Income Tax Act the income on the property will be deemed to be that of the donor spouse if the sole or main purpose was to reduce, postpone or avoid the donor’s liability for tax. There is a similar provision in the Eighth Schedule to the Income Tax Act (paragraph 68) that attributes the gain to the donor spouse.