[FAQ] Property financed by a taxpayer but registered in the spouse’s name

[FAQ] Property financed by a taxpayer but registered in the spouse’s name

• 10 November 2020
• Individuals Tax
• Piet Nel

Background

A taxpayer purchased a property to renovate and resell. This property was financed by the taxpayer but registered in the taxpayer's spouse's name (they are married out of community of property). While the property was being renovated it was rented out at a minimal rate, for two months during the 2020 year of assessment, to someone who looked after the property. General running expenses were claimed against this rental income for the year, which SARS subsequently disallowed. SARS issued an additional assessment for the 2020 year of assessment. The income could not be declared in the hands of the owner(spouse) as she would not have been able to claim the interest on the bond, as the bond for the property is not in her name. As the rental income and expenses were declared in the hands of the taxpayer (bondholder), why did SARS disallow these expenses?

Answer

The Income Tax Act

The fact that the taxpayer “would not have been able to claim interest on the bond, as the bond for the property is not in her name” is not reasonable grounds for the “tax position” taken with respect to the income derived from the property.

The general principle is that a deduction can only be made if the taxpayer carries on a trade and then the deduction can only be made against the income derived from the trade. From the facts it is possible that the trade has not commenced yet, with respect to the development and sale of the property. Section 11A of the Income Tax Act deals with expenditure (and losses) incurred prior to the commencement of and in preparation for carrying on a trade. These expenses are accumulated and can only be deducted when income is derived from the trade. But, as the definition of trade includes the letting of any property, the taxpayer may be able to meet the onus of proof with respect to that requirement.

We are not sure what grounds SARS gave on the additional assessment and can’t provide specific guidance with respect to that. You will have to deal with that ground. We don’t believe that SARS disallowed the expenses because the property was not registered in the name of the taxpayer. In any event, you will have to be certain about the reason for registering the property in the name of one spouse and declaring the income in the hands of the other. With income we also refer to the amount in respect of the trading stock and the amount to be realised on the disposal of the property.

Application of the principles

In essence, the question that must be asked is why “the income is received into the taxpayers account”. If “such income was derived by the recipient in consequence of a donation, settlement or other disposition made by the donor … or of a transaction, operation or scheme entered into or carried out by the donor … and the sole or main purpose of such donation, settlement or other disposition or of such transaction, operation or scheme was the reduction, postponement or avoidance of the donor's liability for any tax,” then the income is deemed to have accrued to the donor spouse (the husband in this instance).

You must also confirm that the intention was not that property is jointly owned.

Webinar Commentary

Further webinar commentary on Income Tax consequences of donations can be accessed here.

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