Can you qualify for a primary residence exclusion for the time period you stayed in the property before renting it out? Property was bought after 1 October 2001.
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
The SARS CGT guide, part of which you attached, provides a good explanation of the law in this regard. We didn’t read the ABC guide. The only implication of 1 October 2001 is that it determines the effective starting date of the tax on capital gains. The period of use, as a primary residence, or otherwise, prior to that date is ignored.
The relevant law is found in paragraph 49, read with paragraph 44 of the Eighth Schedule to the Income Tax Act. We submit that paragraph 48 doesn’t apply here.
In terms of the definition (in paragraph 44 of the Eighth Schedule to the Income Tax Act) a ‘primary residence’ means “a residence—
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in which a natural person or a special trust holds an interest; and
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which that person or a beneficiary of that special trust or a spouse of that person or beneficiary—
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ordinarily resides or resided in as his or her main residence; and
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uses or used mainly for domestic purposes”.
When the property is no longer “used mainly for domestic purposes”, it is no longer a primary residence. However, because a residence is not a personal use asset, the use thereof for purposes of trade (when the property was rented out), will not be a change in use and consequently not treated as a disposal under paragraph 12 of the Schedule. The capital gain (or loss) will therefore only arise when the property is finally disposed of. The Act allows for an apportionment of the gain where the person was “not ordinarily resident in that residence throughout the period … during which that person or special trust held that interest…” Refer to paragraph 49 and the SARS CGT guide deals with this in Chapter 11. The view that the full capital gain is ‘taxed’ is therefore an incorrect one.
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.