Is occupational interest payable and received added/deducted from base costs or proceeds on disposal of primary residence. Client disposed of property during 2018 tax year and transfer only took place 7 days after occupation. He received less occupational
Important:
This answer is based on tax law for the year ending 28 February 2019.
Answer:
According to Judge Nienaber (in Thompson v Scholtz) “occupational interest is the return which the seller of immovable property earns by permitting his purchaser, pending payment, to occupy the property sold …” and also that “the occupational interest in turn is related not to the use of the property sold but to the purchase price, which is again related to the value of the property and not to its temporary use.”
The issue then is whether the occupational interest that accrues in respect of the disposal of the property sold is proceeds or is expenditure incurred in acquiring the other property.
Base cost
Under paragraph 20, specifically subparagraph (c), “amounts actually incurred as expenditure directly related to the acquisition or disposal of that asset” are included in the base cost of the asset. It then defines the expenses in items (i) to (ix). Paragraph 20, or items (i) to (ix) specifically, doesn’t refer to ‘occupational interest’ paid by the person acquiring the asset.
Items (i) to (ix) includes the ‘transfer costs’ that you refer to. The Act doesn’t define what ‘transfer costs’ are. The SARS guide, Issue 6, explains that transfer costs of immovable property include “the cost of obtaining a certificate of compliance for electrical installation …, an electric fence system compliance certificate …, a Gas certificate of conformity …, a certificate of compliance of water installation …, and an entomologist’s certificate … for the purposes of effecting transfer. It doesn’t mention occupational interest and we submit that the emphasis should be on costs incurred ‘for the purposes of effecting transfer”.
Proceeds
Under paragraph 35(1), “the proceeds from the disposal of an asset by a person are equal to the amount received by or accrued to, or which is treated as having been received by, or accrued to or in favour of, that person in respect of that disposal…”
It is, in our view, clear from the judgement by Judge Nienaber that occupational interest is received because the property is made available to the purchaser before transfer of ownership is given. Without giving an opinion thereon, we submit that it is not in respect of the disposal of the property. It is also “any amount of the proceeds that must be or was included in the gross income of that person” – see paragraph 35(3).