plan4cgt-Primary residences - Apportionments

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Apportionments - Primary residences

Period-apportionment/Apportionment iro not ordinarily resident

There is a requirement that the owner of the interest, (“the owner”), or spouse, must ordinarily reside or have ordinarily resided in that property as the main residence. In order to enjoy no exposure to CGT on the disposal of a residence, the occupation by the owner or spouse as the main residence must be continuous from 1 October 2001 onwards, (or from the date of acquisition if acquired after that date), to the date of disposal.

Note that the period of occupation prior to 1 October 2001 has no bearing on the period apportionment itself; it may, however, assist in supporting your ordinarily resident status. The period of ownership prior to CGT will also effect the time-apportionment base cost of the asset.

If the occupation of the residence as the main residence is not continuous, (or is not treated as being continuous), some of the gain will be taxed. This is evident from the examples below.

In order to qualify for some measure of the primary residence exclusion, it is sufficient that your residence qualified as a primary residence for part of the time from 1 October 2001,(or thereafter if acquired after that date). The ratio of the period occupied as a primary residence to the period of ownership, (the relevant period - also measured from the same date), is what counts.

There are certain specific circumstances where you will be treated as being ordinarily resident in a residence, despite the fact that you may be absent from that residence or even where another residence is the primary residence.

Examples of period apportionment

Example 1

You acquired a residence in December 1995. You, (or your spouse), occupy the house as the main residence from that date to October 2003. After that you acquire another residence and that becomes your primary residence. In September 2006 you sell the first residence.

The period of ownership prior 1 October 2001 is totally irrelevant to the calculation of the period apportionment. What is relevant is that for 60 months after 1 October 2001 you owned the residence. However, you occupied it as a primary residence for only 25 months during that period, (from October 2001 to October 2003). Therefore 25/60th’s of the gain will qualify for the primary residence exclusion.

Let’s put some numbers to this. Say the house cost R200 000 including transfer duty. It was sold for R350 000 and selling costs of R15 000 were incurred.

First work out the capital gain - The capital gain will be the difference between the proceeds, (R350 000), and the base cost, (R215 000), i.e. R135 000.

Next work out how much of the capital gain ranks for exclusion - In this case the house was occupied as a primary residence for 25/60th’s of the relevant period of ownership. This factor must be applied to the gain to determine the exclusion, i.e.R135 000 x 25/60 = R56 250.

Of the gain of R135 000, it means that R78 750, (R135 000 - R56 250), is taxable. This means that if you are taxed at the maximum marginal rate of 40%, then, at an effective rate of 10%,  R7 875 tax will be payable, (annual exclusion aside).

Example 2

This example illustrates the point that you can still enjoy a R1million exclusion even if you did not occupy the house on a continuous basis during the relevant period. However, as noted above, it is inevitable that some of the gain will be taxed.

The facts are similar to the last example insofar as the period of ownership and occupation as a primary residence are concerned. However, we will apply different (greater) values.

You acquire a residence in December 2001. You, (or your spouse), occupy the house as the main residence from that date to January 2004. After that you acquire another residence and that becomes your primary residence. In December 2006 you sell the first residence.

The relevant period of ownership is for 60 months, (as measured this time from the date of acquisition, being later than 1 October 2001). You occupied it as a primary residence for 25 months. Therefore 25/60’s of the gain will qualify for exclusion.

Say the house cost R2million including transfer duty. It was sold for R4.5million. Ignore selling costs.

First work out the capital gain - the proceeds are R4.5million and the base cost is R2million. Therefore the gain is R2.5million.

Next work out how much of the capital gain ranks for exclusion - In this case the house was occupied as a primary residence for 25/60th’s of the relevant period of ownership. This factor must be applied to the gain to determine the overall exclusion, i.e.R2.5million x 25/60 = R1 041 666.

The above amount theoretically ranks for exclusion as it represents the portion of the gain that is attributable to that asset being a primary residence. However, the exclusion is limited to R1million. Therefore, the taxable element of the capital gain will be R1.5million, (R2.5million total gain less R1million exclusion).

Again, if you are taxed at the maximum maginal rate of 40%, the effective rate will be 10% and R150 000 tax will be payable, (annual exclusion aside).

Whether or not this period apportionment applies hinges very much on the concept of ordinarily resident. This concept has been fairly thoroughly explored in tax cases relating to whether or not you are considered to be a resident in South Africa. Such tax cases will be instructive in this determination, yet it could be that the courts take a narrower view. .

Usage apportionment/Apportionment for “non-residential use”

In our introductory primary residence page we set out a simple example in order to illustrate that the primary residence exclusion is not as straightforward as many imagine it to be. The basic premise surrounding the usage apportionment is why should SARS exclude any portion of the gain that is related to that part of the residence that is not used for domestic purposes. If, for example, you carry on a trade, (or have carried on a trade), in that residence, then that part of the residence that is used for trade purposes should not qualify for the exclusion at all.

When this usage apportionment is combined with the period apportionment it gets a little tricky. What you did with the house prior to 1 October 2001 is irrelevant. The relevant period is as per the period apportionment.

Again, there is an exception.

Examples of usage apportionment.

Example 1- Illustration of basic concept

You acquire a home after 1 October 2001 for R200 000. You rent out a portion of your house, (approximately 25%), from that date until you sell it and occupy the remainder as your primary residence.The house cost R200 000 and you sell it for R350 000.

First work out the capital gain - The proceeds are R350 000 and the base cost is R200 000, therefore the capital gain is R150 000.

Then work out how much of that gain qualifies for exclusion, i.e. ask yourself - To what extent did that residence act as a primary residence, (from 1 October 2001 or from date of acquisition, (if later)), onwards? The answer is 75% of the house acted as a primary residence.

Therefore of the overall gain of R150 000, R112 500, (being R150 000 x 75%), is attributable to that residence being a primary residence. It is that amount that will be excluded from the CGT net. The remainder, R37 500, will be taxed.

Example 2 - Usage apportionment combined with what looks like a period apportionment, (but isn’t).

You acquire a house on 1 December 2001 for R500 000. You occupy the entire property as a primary residence for four years. You start a business from home and that business takes up 25% of your property. You sell the house 5 years later for R1.1million. 

As ever, the first step is to calculate the capital gain. It is R600 000, (R1.1million less R500 000).

As there is no period aportionment, the next step is to calculate the usage apportionment. One way to approach this type of problem would be to apply notional units to each year. Say 100 units applies to a year of full occupation and ownership, (during the relevant period). Total available units over the relevant period of ownership is 900, (9 years x 100 units). The total number of units attributable to the primary residence element is 775, [(4 years x 100 units) + (5 years x 75 units)].

Therefore of the time you had your home, 775/900th’s is attributable to it being a primary residence, (or you could say, of the 900 units of space available, 775  were used for domestic purposes). Therefore of the capital gain of R600 000, 775/900th’s of that amount ranks for the primary residence exclusion, (R600 000 x 775/900 = R516 667).

Therefore R83 333, (being R600 000 less R516 667), is taxable.

This example may look like a period apportionment but it isn’t. The period apportionment is related to the time during the relevant period that you, (or your spouse), are not ordinarily resident in your home as the main residence. In this example you were always ordinarily resident, it was just that for some of the time a portion of the home did not act as a primary residence. The next example is a simple combination of both usage and period apportioments. The last example approaches this type of problem slightly differently. We advise you to review the next one first.

Example 3 - Usage apportionment combined with period apportionment.

You acquire a home as your main residence in December 2001 for R400 000. You immediately allocate 30% of the space to your business. This continues for five years after which you acquire another primary residence. Six years later you sell the original house for R1.3million.

In this case the house was a primary residence for part of the time. The steps to determine the exclusion are-

  • Work out the capital gain.
  • Work out how much of that gain ranks for exclusion in terms of the period apportionment.
  • Work out how much of the balance is attributable to that part of the house that acted as a primary residence, (the usage apportionment).

The capital gain, in total, is R700 000, (R1.1million less R400 000).

The period it was occupied as a primary residence was for five of the eleven years. Therefore of the R700 000 gain, five-elevenths of that gain is attributable to the period that it was a primary residence, i.e.R318 181, (R700 000 x 5/11).

However, during that time that it was a primary residence only 70% of the space was occupied as such. Therefore the primary residence exclusion will be R318 181 x 70% = R222 726.

Therefore of the total gain of R700 000, R222 726 will be excluded and R477 274 will be taxable.

Example 4 - Complex apportionment example using period and usage apportionments as well as differing usage elements over the relevant period.

You acquire a house in December 2001 for R350 000, it is 200 sq metres. You occupy the entire house for three years, thereafter you rent out a 25% of that house for the entire period of ownership.Your mother is starting to age a little now and you build a 70 sq metre granny flat, costing R100 000, in December 2006. Your mother, however, decides not to move in and you use that flat for strorage. Three years later your mother moves into the flat. Two years later she dies and you move out of the house and buy another primary residence. At the end of November 2015 you sell the first house for R2million. 

The example looks a little daunting, therefore approach it logically and step by step.

First work out the capital gain - R2million less R450 000 = R1 550 000.

Then work out the period apportionment. This will give the basis on which the usage apportionment acts. In this regard the house was owned for 14 years during the relevant period and for the last four years it did not act as a primary residence at all. Therefore the portion of the gain that is eligible for exclusion (prior to applying the usage apportionment), will be R1 550 000 x 10/14 = R1 107 143.

In order to work out the usage apportionment we will set up a table. The approach is similar to the approach taken in example 2 above, (where we allocated units). In this case we have floor space dimensions. The question is this - How much floor space, (in relation to the total available floorspace), was occupied as primary residence over the ten year period that it was a primary residence. 

Table to calculate usage apportionment

Column 1

Column 2

Column 3

Column 4

Column 5

Column 6

Year

Total Space

 Space as primary res

No. of years

Primary residence space, (column 3 x column 4)

Available space, (col 2 x col 4)

Dec01 - 04

200

200

3

600

600

Dec04 - 06

200

150

2

300

400

Dec06 - 09

270

220

3

660

810

Dec09 - 11

270

220

2

440

540

Total

 

 

10

2 000

2 350

Notes

After the granny flat was built, in December 2006, total available space increased from 200 to 270 square metres. The space occupied as a primary residence, (i.e. that that was occupied for domestic purposes), increased accordingly from 150 to 220 square metres.

The time that the mother occupied a portion of the house should be counted into the domestic use.

We have no need to concern ourselves any longer with the period from December 2011 to the date of sale in November 2015, as we have already extracted the quantum of the gain relating to the qualifying primary residence period, (it was R1 107 143). This was done in the step prior to the table.

All that remains, as far as the determination of the exclusion is concerned, is to calculate the usage apportionment. The portion of the gain eligible prior to the usage apportionment is R1 107 143, (as per above). Over the primary residence period we used 2000 of  2 350 square metres of space, (per the table above). Therefore our exclusion is R1 107 143 x 2000/2 350 = R942 249.

Therefore of the total capital gain of R1 550 000, R607 751 will be taxable, i.e.R1 550 000 less R942 249.

Size apportionment

A limit has been placed on the size of the ground that qualifies for the primary residence exclusion. In this regard the primary residence exclusion incorporates the land on which the primary residence is situated, but only to the extent of two hectares. It should also be remembered that the qualifying land, (up to two hectares), can also include unconsolidated adjacent land, (in certain circumstances).

Land-related apportionments of capital gains/losses into that that qualifies for the primary residence exclusion and into that that doesn’t, will arise in the following circumstances-

  • Where the primary residence is situated on more than two hectares of land.
  • Where a portion of the land, (even if the land is less than two hectares), is used for trade, (for example, the growing and sale of vegetables). Note- this would be more of a usage apportionment..
  • Where the adjacent land is not consolidated or is deconsolidated prior to sale and the special circumstances permitting its inclusion in the primary residence exclusion are not fully complied with.

Clearly this type of apportionment can arise in conjunction with the other types of apportionments. The calculation of the gains qualifying for exclusion when the period and usage apportionments acted together was tricky enough! When all three apply you just have to remember this-

  • Calculate the size apportionment first.
  • Calculate the period apportionment next, (using the figures arrived at in the first calculation).
  • Using the latter result, calculate the usage apportionment.

There are some serious practical difficulties relating to the size apportionment i.e. how much of the base cost is attributable to the respective portions of land and how much of the proceeds are attributable to those respective portions? In all probability valuations will be needed! Furthermore, it would be advisable to specify in the sale agreement as to how much is allocated to the two hectares, or, at the very least, how much is attributable to all of the land at the time of disposal.

Example of size apportionment

Example 1 - Basic example

The figures used below are the same as those used in SARS’s “Comprehensive Guide to Capital Gains Tax”. This is not a great example as the full R1million exclusion ultimately applied, (because the numbers were so big). Nevertheless, it illustrates the process. The example is unclear as to the location of the improvements to the land. While the example below is a little clearer, you have to question what if the improvements related wholly to the two hectares that qualified for the exclusion? The answer would be to either get a valuation at the time of sale or specify the proceeds attributable to the primary residence element.

You acquire a three hectare piece of land for R2 450 000. R1 750 000 of the purchase price was attributable to the land and R700 000 to the residence. Additions of R120 000 were made to the land and R30 000 to the building. The land was sold for R6million of which R5million was attributed to the land. Agents commission of R480 000 was incurred.

First work out the overall capital gain - It is R2 920 000, (Proceeds of R6million less a base cost of R3 080 000, (R2 450 000 + R120 000 + R30 000 + R480 000)).

Then work out the gain attributable to the respective elements. If the selling costs are R480 000 and one sixth of the total selling price is attributed to the building, then R80 000 of the R480 000 selling costs should be attributed to the building on a pro-rata basis).Therefore the the gain attributable to the building is R190 000, (R1million less (R700 000 cost + R30 000 improvements + R80 000 commission).

The gain attributable to the land is R2 730 000, ( R5million proceeds less a base cost of R2 270 000, ( R1 750 000 cost + R120 000 additions + R400 000 selling costs)).

The land is three hectares in extent, but only two hectares qualify for the primary residence exclusion, therefore the qualifying portion of the gain on the land will be R1 820 000, (R2 730 000 x 2/3).

As such, the total amount qualifying for exclusion will be R2 010 000, (being R190 000 on the building and R1 820 000 on the land).

However, the exclusion is limited to R1million. Therefore of the overall gain of R2 920 000, R1 920 000 will be taxable.

Example 2 - Size apportionment with period apportionment.

You acquire a residence in December 2001 for R1million. The land’s value at that time was R300 000 and it was 15 hectares in extent. You occupy the residence as your main residence for three years thereafter you allow your son to stay in it. At this time you move down to the coast and acquire another residence which you occupy as your primary residence. In December 2010 you sell the property for R4million. In terms of the sale agreement R800 000 was atrributable to the land.   

First work out the overall capital gain - it is R3million, (R4million less R1million).

Split the capital gain into its component parts i.e. how much of it is attributable to the primary residence. As far as the building is concerned it is fairly easy, i.e. a capital gain of R2.5million, (R3.2million less R700 000), arises.

As far as the land is concerned, there is a capital gain of R500 000, (R800 000 less R300 000).

If the land is 15 hectares it is reasonable to assume that the gain on the land that is eligible for the primary residence exclusion is R500 000 x 2/15 = R66 666.

Therefore the gain attributable to the primary residence plus qualifying land is R2 566 666.

As far as the period apportionment is concerned, the property was owned for nine years during the relevant period, but it was only a primary residence for 3 of those years. Therefore, of the gain that could be attributed to the primary residence element, only 3/9ths of the gain qualifies. Therefore the primary residence exclusion will be R855 555, (R2 566 666 x 3/9).

As the overall gain was R3million, R2 144 445, (R3million less R855 555), will be taxable.  

Joint ownership apportionment

Apart from the married in community apportionment, (which is a doddle to work out), this can be quite difficult.

The general principle is that the primary residence exclusion operates on a per residence basis, as opposed to a per person basis, (there is a specific provision that provides that where a residence is owned jointly, the exclusion will be apportioned in relation to the respective interests).

Married in community of property

There may be exceptions to our approach, but none come to mind! If you have been through the other examples you will notice that there is a specific process that we follow, the last one below is our last addition to the list -

  • Work out the overall capital gain/loss first.
  • Work out the size apportionment next.
  • Work out the period apportionment next.
  • Work out the usage apportionment next.
  • Divide the result in two.

You can take any of the results in any of the above examples and divide the exclusion by two. That will be the exclusion applicable to the respective partners in “marriage”, (if married in community of property). By the same token, you can take the taxable element of the capital gain, (the gain after the exclusion), and divide that by two. The result will be the taxable portion of the gain that applies to the respective partners.

There is nothing more to be said!

Joint ownership not on a fifty-fifty basis or where other apportionments apply

Complications arise where one or both of the owners are subject to other types of apportionments. The following example uses size apportionment together with the period apportionment to illustrate the process.

Example - Joint ownership where one of the parties is subject to another form of apportionment.

Tim and Mark, (who are not involved in a same-sex relationship), acquire a residence on a fifty-fifty basis for R500 000 in November 2001. The land was 3 hectares in extent and R100 000 was allocated to the cost of the land. They occupy the residence as their primary residence. After four years Tim gets married and vacates the premises. Mark remains there for another three years after which it is sold for R1.2million, (of which R400 000 of the proceeds were attributed to the land). 

In this case the step-by step approach taken when the properties were owned by a couple married in community of property will not work. You have to get to the overall gain that is attributable to the residence plus the two qualifying hectares of land. From there the other apportionments, (if any), follow.

First work out the capital gain - It is R700 000, (R1.2million less R500 000).

Split the gain into the residence (building) element and into the land element. The residence realised R800 000 proceeds and its base cost is R400 000. Therefore the capital gain on the residence is R400 000.

The gain on the land is R300 000, (R400 000 proceeds less R100 000 base cost). One third of the land does not qualify for the primary residence exclusion, therefore of the R300 000 gain on the land, R200 000 ranks for exclusion.

As such, of the total gain of R700 000, R600 000 qualifies for the exclusion. (It is only the capital gain attributed to the ‘excess’ third hectare that is disqualified at this stage.)

Mark’s 50 percent share of the gain is R350 000. Mark’s share of the gain that may be excluded is 50% of R600 000, i.e. R300 000. Therefore Mark will be taxed on R50 000.

Tim has also enjoyed a capital gain of R350 000 of which only R300 000 qualifies for the exclusion. However, Tim is subject to a period apportionment as he only occupied the house as a main residence for 4 of the seven years that he owned his share of the property during the relevant period. Therefore of the R300 000 capital gain that qualifies for the exclusion, only 4/7th’s of that amount fully qualifies. Therefore Tim’s exclusion will be R171 428, (R300 000 x 4/7).

Tim will therefore be taxed on a capital gain of R178 571, (R350 000 less R171 429).

Check - In total Tim and Mark are taxed on R228 571. This should be equivalent to the proceeds of R1.2million less the base cost R500 000 less the exclusions of R300 000 and R171 429.

As far as disclosure is concerned, both would declare their share of the proceeds, (R600 000 each), their share of the base cost, (R250 000 each), and calculate their respective exclusions.