[FAQ] The distribution of property income between spouses

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[FAQ] The distribution of property income between spouses

• 19 February 2021
• Individuals Tax
• Piet Nel

Background

A taxpayer is married out of community of property. The couple bought a property for the purpose of renting it out together. The husband is on the 41% tax bracket and the wife on 26%. They want to allocate 20% of the profit to the husband and 80% to the wife. They also want to change this percentage every year according to each person's tax bracket for the applicable year.

Kindly advise if the percentage profit may be changed every year of assessment depending on their other income for the year?

Answer

The Income Tax Act

For purposes of the tax position you will be taking here, or opinion you will be giving your clients, what SARS’s view is, is absolutely irrelevant. The taxpayer bears the onus of prove “that, reasonably considered in light of the relevant facts and circumstances, obtaining a tax benefit was not the sole or main purpose of the avoidance arrangement.” See section 80G of the Income Tax Act.

Incidentally, with respect to the case 15 years ago, we are not sure why section 7(2) didn’t apply. It may well apply in the current instance as well – … 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 ...

When two people own property together in undivided shares, it is advisable to enter into an agreement which will regulate their rights and obligations, and which states the terms and conditions of their ownership.

It doesn’t matter if they are an unmarried couple, married out of community of property or just joint owners as partners in a property joint venture or even a holiday home.

The extent of the shares held by the co-owners do not have to be equal. If one of the parties, for instance, own a 60% share in the property, it does not mean that the party owns a larger part of the property. It merely means that that party would have to pay 60% of the purchase price and costs of purchasing the property and would be entitled to 60% of any profit derived from the sale or lease of the property. Parties would therefore be able to agree the percentage of the interest held, but what the parties pay, may well be relevant to determine the ratio.

Judge Tshiki, in Claassen v Quenstedt and Others, said the following, which may be relevant: “As a matter of law co-ownership in itself cannot be equated with partnership, the latter being a term of wider ambit. Partners may very well be co-owners of the property owned by them, but the converse does not apply in the absence of evidence clearly establishing this.”

Webinar Commentary

Further webinar commentary on Transactions between spouses (section 7(2)) can be accessed here.

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