Mr Manuel offers to buy your primary residence, and he does so via an unconditional purchase. At the same time he offers to buy the adjacent land, but this is subject to a suspensive condition-any suspensive condition. For example, that the servitude is set aside; that the soil bears certain characteristics; that a rezoning application be approved, and so on.
Even if both deals are finalised, (irrespective of the date of registration - which is irrelevant), the disposals are subject to different timing rules. The timing of the disposal
relating to the unconditional offer is when the contract is concluded, (upon the acceptance of the offer by yourself). The timing of the conditional offer is when the condition is met. The point here is to make
yourself aware of the timing rules, and if in doubt, consult a professional.
The trade concept
This concept is of particular relevance insofar as the usage apportionment is concerned. The floor space dedicated to the earning of rental income will not, apart from the specific instance outlined above, be taken into account in the determination of the primary residence exclusion. But what else will not qualify?
Provisions of the Income Tax Act
The general deduction provisions of the Income tax Act allow for the deduction of expenditure, (not of a capital nature), that is incurred in the production of income, provided
that it is incurred in the course of trade. The earning of rental income is specifically included in the carrying on of a trade. As such, costs associated with the space in a residence that is allocated for
business purposes may be claimed as a tax deduction.
SARS have persistently resisted the creation of tax losses from renting out homes, in particular, holiday homes. Their basic counter argument is that the taxpayer has an ulterior
motive, (to get SARS to partially finance the costs associated with that house, (interest costs and so on)). However, SARS does have a tendency to allow the deduction of current expenditure, (interest, rates,
repairs and so on), to the extent of income earned, thereby allowing the taxpayer to break-even from an income tax perxpective.
Many taxpayers carry on a business from home and to this end deduct a proportion of interest costs, rentals paid, rates and so on against income earned. These are perfectly
legitimate deductions as they arise in the course of trade. When you dispose of your home SARS should be well aware that part of your home does not qualify for the primary residence exclusion. So watch out!
Some people dedicate a portion of their home as a home office. The deduction of home office expenditure against employment income, (which falls within the trade concept),
has been severely curtailed.
It is quite likely that the tax saving generated by claiming home associated business costs against normal income would outweigh the CGT liability resulting from having a smaller
primary residence exclusion. However, beware of the fact that if more than fifty percent of your residence is dedicated to trade, the exclusion will not apply at all.
Repairs, (and other ongoing costs)
There are certain specific categories of expenditure that are included in the base cost of an asset. The cost of acquistion of an asset clearly qualifies as do the cost of improvements. (In the latter case there is a restriction in that improvements will only qualify if they are still reflected in the asset at the time of disposal.)
Running costs incurred on residences can be substantial. Such costs would normally include bond interest, rates, insurance and repairs and maintenance. These costs will almost
invariably not qualify for the inclusion in the base cost of a residence.
From an income tax perspective there can be a fine line between repairs and improvements. There have been a great many tax cases on this and certain
principles can be drawn, but the matter is not at all clear. Up to this point, in South Africa in any event, taxpayers have sought to classify expenditure as repairs as such a classification could result in an
income tax deduction, (where the asset concerned is employed in the production of income). From the point of view of running a business this perspective will not change.
However, from a private person’s perspective, the classification of expenditure on residences as improvements should be the major focus. If major expenditure is considered, it would
be advisable to familiarise yourself with the distinction between repairs and improvements.
Expect many more repair vs. improvements disputes!
The importance of this concept is related to the fact that there will be what we refer to as a ‘period apportionment’ in respect of the gain/loss
into that that qualifies for the primary residence exclusion and into that that doesn’t.
The “ordinarily resident” concept has been considered in South African tax cases principally in relation to whether or not you are considered to be ordinarily resident in South
Africa. It has never been considered in the light of whether, given that you are resident in South Africa, you are resident in this residence or that residence. There could be a subtle difference in
SARS’ Comprhensive Guide to Capital Gains Tax refers to interpretation note 3 in this regard. However, the thrust of this interpretation note concentrates on the ordinarily resident
in South Africa situation.
The following considerations are important-
- The country the which the person would naturally and as a matter of course return form his wanderings.
- His usual or principle residence or real home.
- Living in a place of some degree of continuity, apart from temporary absences.
- Part of a person’s ordinary regular course of life to live in a place with a degree of permanence, (not temporary or casual).
- The question as to whether or not you are ordinarily resident is one of degree, you have to look at the taxpayer’s mode of life beyond the period in question.
There are no hard and fast rules! Let’s have a look at an example in the Comprehensive Guide.
Thomas is transferred from East London to Durban. He retains his East London home that he has had for 20 years and allows his son, who is finishing his studies to stay there, rent-free. In the meantime they, (Thomas
and his wife), rent a residence in Durban, not only that, they also spend their holidays in East London and stay in the home. Thomas has only two years to go before he retires after which he itends returning to East