How should the Capital Gain / Loss be calculated?
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
We accept that the parties will be able to rebut the presumption of purpose – see section 80G of the Income Tax Act. We didn’t comment on the fact that “the seller would be entitled to 50% of the profit on the sale of the property if the buyer would ever sell the property”.
Paragraph 39 would apply in respect of the disposal of an asset to a person who was a connected person in relation to that person immediately before that disposal. (Note that paragraph 38 would apply if the asset was disposed of to a person who is a connected person in relation to the person (the person disposing of the asset) for a consideration which does not reflect an arm’s length price).
As defined in section 1(1) of the Income Tax Act, a ‘connected person’, in relation to a natural person mean any relative. A “relative” in relation to any person, means the spouse of such person or anybody related to him or his spouse within the third degree of consanguinity, or any spouse of anybody so related. We agree that a cousin, a child of one's uncle or aunt, would not be related to the person in the third degree. Nephews and nieces (children of a brother or sister) are related to the third degree of consanguinity.
You must remember that, when persons marry in community of property they each dispose of half their assets to each other except for assets excluded by antenuptial contract before the marriage. This however, is merely a roll-over, the capital gain is only accounted for on the subsequent disposal of the property. The proceeds is then deemed to accrue to them equally.
With regard to the primary residence exclusion, the following is relevant:
Because a residence is not a personal use asset, the use thereof for purposes of trade (property thereafter was being rented to tenants), will not be treated as a disposal under paragraph 12 of the Schedule.
After vacating the property, it was no longer used by the taxpayer as a primary residence. 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) of the Schedule. So, in this instance an apportionment of the capital gain is made under paragraph 49. The result would be that the capital attributable to the trade use will result in a capital gain that doesn’t qualify for the R2 million exclusion. The primary residence exclusion would be available to the period before.
This of course accepts that paragraph 48 doesn’t apply. It treats a natural person for purposes of paragraph 47 as having been ordinarily resident in a residence for a continuous period (not exceeding two years), if that person did not reside in that residence during that period for the following reason:
at the time the residence was that person’s primary residence it had been offered for sale and vacated due to the acquisition or intended acquisition of a new primary residence.