One of our clients has a primary residence she is selling now. Now we know the first R1.5 mil is excluded from CGT. She rented the house to her sister and she has declared this on her previous returns. Do SARS regard this as secondary residence or can we
Important:
This answer is based on tax law for the tax year ending 28 February 2013.
Answer:
We are not sure what the R1,5 million amount is that you refer to. We accept that the reference is to the exclusion (R2 million) found in paragraph 45 of the Eighth Schedule to the Income Tax Act - in essence that the request doesn’t relate to the 2012 year of assessment. The increase in the amount of R1,5 million to R2 million came into operation on 1 March 2012 and applies in respect of years of assessment commencing on or after that date.
Paragraph 45(1)(b) of the Eighth Schedule to the Income Tax Act, was always R2 million, but based on the facts is not available in this instance.
The principle is that the primary residence exclusion (R2 million) does not apply where the individual used that residence (or a part thereof) for the purposes of carrying on a trade – see paragraph 49(b). the paragraph 45 exclusion is also not available in respect of the period (or periods) where the individual was not ordinarily resident in the residence – see paragraph 47.
From an Income Tax point of view, when there is a change in use of an asset the taxpayer is normally treated (for the purposes of capital gains) as having disposed of the asset. As the residence is not a personal use asset, no change in use (for purposes of the Eighth Schedule, took place.
So, in this instance an apportionment of the capital is therefore made under paragraph 49, but it would (based on the facts) be the same as the paragraph 47 one. The result would be that the capital attributable to the trade use will be result in a capital gain that doesn’t qualify for the R2 million exclusion.