The second of the four exceptions, is that you will be regarded as being ordinarily resident in a residence for up to two years, if that residence was being erected on land acquired for the purpose of occupying that residence as a primary residence.
In this regard there seems to be some consternation that the ‘only one primary residence rule’ is not overridden by this exception. In our view this rule also affords you to have two
primary residences at once i.e. the one you are in and the one being built.
Apart from what we have stated immediately above, there seems to be little explaining to do. Quite simply, you will be regarded as being ordinarily resident for a period of up to two
years where land has been purchased with the object of erecting a primary residence thereon.
Nevertheless, despite the exception’s relative simplicity, there are a number of interpretational difficulties-
When does the period of deemed ordinary residence begin? Is it when the land is purchased? When plans are drawn up? When the erection physically begins?
What happens if you fully intend to occupy the residence as a primary residence, but change your mind on the matter?
The third of the four exceptions that
allows for continuity of the period of ordinary residence for up to two years, is if the residence was accidentally rendered uninhabitable.
Again we see no reason why two residences should not be regarded as primary residences in terms of this rule. For example, if your home is badly fire-damaged, it would be quite a
reasonable proposition to acquire a new primary residence and fix up the old one when the insurance pays out. The fire-damaged residence could then be disposed of and none of that time when you occupied the new
residence as the primary residence should disturb the period of deemed continuous occupation of the old primary residence.
Having said that though there is a certain technical difficulty with this!
The fourth and final exception that allows for continuity of the period of
ordinary residence for up to two years, is if the person with the interest in the residence dies.
Upon death there is a disposal of all assets previously owned by the deceased. However, the wording of the provision does not appear to cater for the intended relief as interpreted by SARS, (set out below). Nevertheless the interpretation is useful!
In terms of SARS’ draft Comprehensive Guide to Capital Gains Tax, on page 159, we quote -
“...a primary residence held by the deceased estate is treated as being ordinarily resided in by the deceased person
for a maximum period of two years after the date of death. Should the executor take longer than two years to dispose of the residence, the period exceeding two years will not qualify as a primary residence, and the gain or loss must be apportioned. The R1million exclusion may only be set off against the portion of the gain applicable to the first two years following the date of death.” (the emphasis is our emphasis).
It is the intention to allow the estate to be taxed at the same rate as the deceased for CGT purposes, and to enjoy the same inclusion rate and exclusions as would have applied to the
deceased, (per page 159 of the SARS Guide).
Nowhere does the legislation lend itself to this form of interpretation, and while it should be advantageous to adopt it, we see some problems in giving effect to it.
Let’s look at an example-
D dies in September 2010. He acquired his primary residence in October 2001 for R1million. He resided in the residence as his primary residence throughout the period. At the date of
death the property was worth R1.5million. This property was not bequeathed to anyone and was realised by the executor for R1.8million, three years after the date of death.
The legislation as it stands is not, in our view, capable of the interpretation set out in the above italics, however, we have little else to go on other than what is set out in the
Thre seems to be two ways of interpreting this -
- Calculate the gain applicable to the deceased as at the date of death. Thereafter calculate the gain applicable to the deceased estate.
- Calculate the gain applicable to the deceased as if he lived in the house until 2012, (two years after the date of death).