The introduction of capital gains tax ("CGT") as of 1 October 2001 will have far reaching implications for taxpayers. The CGT treatment of residential property depends on whether the property qualifies as a primary residence or not.

Primary residence: If a primary residence is disposed of, then the first R1 million of any capital gain or loss realised on the disposal will be disregarded for CGT purposes. Any amount of capital gain or loss in excess of R1 million in respect of the disposal of a primary residence will be subject to CGT. If more than one natural person or special trust jointly hold an interest in the residence, then the R1 million must be apportioned between all the relevant parties. A primary residence is a residence in which a natural person or a special trust holds an interest. Residences held in companies, close corporations and trusts are excluded from the definition and will not qualify for the R1 million relief as discussed. In addition, the natural person, or beneficiary of the special trust, or a spouse of the person or beneficiary should ordinarily reside in the residence as his or her main residence and use the residence mainly for domestic purposes.

Other residential property: Where residential property does not qualify as a primary residence, such as a holiday home or residential property that is let, it will not be possible to disregard the first R1 million of any capital gain or loss realised on the disposal of the property. If a person, however, moves into a holiday home and this home becomes his or her primary residence, then any capital gain or loss realised on the disposal of the residence must be apportioned between the period that the person was ordinarily resident in the home and the period that the person was not ordinarily resident. The R1 million relief in respect of a primary residence apportioned for the period that the residence was not a primary residence will be available for set-off in respect of the capital gain or loss relating to the period that the person was ordinarily resident in the home.
Primary residences held in companies, close corporations and trusts
In terms of the CGT legislation a primary residence must be held by a natural person or special trust in order to qualify for the R1 million relief discussed above. Historically many individuals have purchased or transferred their primary residences into companies, close corporations and trust, which gave rise to, for example, transfer duty or estate duty savings. The CGT legislation, the Transfer Duty Act and the Stamp Duty Act make provision for the transfer of primary residences out of these entities into the hands of natural persons and special trusts. It is required that the disposal of the residence to the person should take place on or after 20 June 2001, but not later than 30 September 2002 and that the person or his or her spouse should have ordinarily resided in the residence and used it mainly for domestic purposes from 5 April 2001 to the date of registration of the transfer. In addition, the registration of the residence in the person's name should not take place later than 31 March 2003. In respect of residences situated in companies or close corporations there is an additional requirement that the person, either alone or together with that person's spouse, should have directly held all the share capital or members' interest in the company or close corporation from 5 April 2001 to the date of the registration in the deeds registry of the residence in the name of that person or jointly in the name of that person and that person's spouse. If the residence has been held in a trust, the person should have originally disposed of the residence to the trust by way of donation, settlement or other disposition, or have financed all the expenditure incurred by the trust to acquire and improve the residence. If these requirements are met, then the transfer will not give rise to transfer duty, stamp duty or CGT.

Obtaining a valuation: If you own a residential property at 1 October 2001, the question of obtaining a valuation for that property arises. It is generally suggested that valuations should be obtained wherever possible, since this will give the taxpayer an additional option to consider when determining a capital gain or loss on disposal of an asset. If it is decided to obtain a valuation, then the valuation must be performed within the two years starting on 1 October 2001. Although the valuation need not be performed on 1 October 2001, the value reflected in the valuation should be the market value of the property as at 1 October 2001. Therefore, if improvements are effected to the property after 1 October 2001, but before the date on which the valuation is performed, then the valuer should disregard any increase in the value of the property arising from the improvements. The CGT legislation does not prescribe who should perform a valuation and it is anticipated that a valuation by a reputable estate agent will be sufficient. However, a registered valuer will be the safest option. Remember that the onus to prove that a valuation correctly reflects the value of an asset at 1 October 2001 rests with the taxpayer. If the Commissioner is not satisfied with a valuation, then the Commissioner may adjust the value of the asset. Therefore, taxpayers will be well advised not to attempt to obtain valuations that do not reflect the true value of their assets. In addition, if you inflate a valuation and die shortly thereafter, then that valuation may also have an impact on the value of your property for estate duty and rates purposes.

Impact of estate duty: The death of a natural person will, once CGT is implemented, give rise to both estate duty, at a rate of 20%, and CGT. It will, therefore, be necessary to decide, on acquisition of residential property, whether to hold the property in a trust, which could have estate duty benefits. Placing a primary residence in a trust will mean that the R1 million relief in respect of primary residences will not be available. In addition, transfer duty will be payable at a higher rate. Some of the considerations to take into account when deciding on the use of a trust will be the age of the purchaser, as well as whether the purchaser has other assets that will push the purchaser's net asset value over R1,5 million for estate duty purposes. Before making any decisions it will be wise to consult with a tax or financial advisor.

Working from your primary residence: There is a growing trend towards working from home. This does, however, have the effect that a part of the home is not used for domestic purposes and, therefore, it will be necessary to apportion any capital gain or loss between the domestic and non-domestic use. The R1 million relief, apportioned for the non-residential use, will be available for set-off against any capital gain or loss attributable to the domestic use of a primary residence.

Establishing the base cost of residential property: Taxpayers should remember that the option of performing a valuation in respect of an asset exists only where the asset was acquired before and it not disposed of on 1 October 2001 (i.e. a pre-valuation date asset). For all assets that are not pre-valuation date assets, the base cost as determined in the CGT legislation must be used. The Eighth Schedule specifically states which amounts may be taken into account in order to establish the base cost of an asset. The base cost of residential properties will consist of expenditure actually incurred in respect of the acquisition, creation or disposal of the asset, including costs such as stamp and transfer duty, certain amounts of donations tax paid, expenditure incurred to acquire an option to purchase the asset, as well as the cost of obtaining a valuation for CGT purposes. In addition, expenditure actually incurred to improve the asset or to establish, maintain or defend a legal title to the asset will also be added to the base cost of residential property. Remember that taxpayers will be required to retain original documentation to support these amounts. Examples of the documentation that Revenue has in mind are invoices, paid cheques, contracts of purchase and sale, as well as any correspondence in respect of the amounts. Taxpayers will have to retain the documents for four years after the date on which the Commissioner receives the tax return reflecting the capital gain or loss in respect of the asset to which they relate.

Consult specialists: The potential CGT implications are far reaching and not only limited to residential property. Taxpayers will be well advised to seek appropriate assistance from specialists to ensure that they understand these implications and are able to arrange their affairs in the most CGT friendly manner possible.