Deemed Disposals and Tax Residency

Section 9H of the Income Tax Act deals with matters relating to the cessation of residency in South Africa.

This section essentially states that where a person that is a resident ceases to be a resident during any year of assessment, that person must be treated as having disposed of his assets on the date immediately prior to ceasing his residency, and re-acquiring the same assets on a date immediately thereafter. This is referred to as a “deemed disposal”. Similarly, the year of assessment will be deemed to have ended immediately prior to the cessation and to have started on the next day.

Such a “deemed disposal” does not relate to the immovable property that such a person may hold in South Africa.

As a result of his ceasing to be a South African tax resident (an event simply declared by ticking a box on the annual income tax return when submitted), a so-called “deemed disposal” (also sometimes referred to as an “exit charge”) will be activated in terms whereof all the individual’s assets will be deemed to have been disposed of, at market value, on the day before he ceased to be a South African tax resident.

This event, therefore, potentially gives rise to capital gains tax incurred on the deemed disposal. Excluded from this regime, as stated above, is South African immovable property, cash and (although not explicitly stated, though included on a very technical basis) accumulated retirement-related funds. Apart from these assets, all remaining South African and other worldwide assets are included in the “deemed disposal” regime.

Before a taxpayer decides on cessation of tax residency, an investigation should be done into possible tax treaty relief the individual may qualify for. SARS has stated that “an individual who is deemed to be exclusively a resident of another country for purposes of a tax treaty is excluded from the definition of “resident”. It follows that while an individual may qualify as a resident under the ordinarily resident or physical presence tests, that individual will not be regarded as a resident for South African tax purposes if that person is a resident of another country when applying for a tax treaty.”

Based on this, it is clear that section 9H of the Income Tax Act immediately becomes applicable to a taxpayer in the case of financial emigration or the cessation of tax residency, for whatever reason, and may increase tax liability in the current year of assessment in which the cessation of residency occurs. One must, however, always remember the exemptions described above, and in the event that emigration and/or ceasing to be a tax resident is considered, pre-emigration planning is of utmost importance to ensure that a smooth and fluid transition plan is formulated.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

Setting your business up for expansion

When businesses expand, they often look beyond national borders. With such an expansion, there are several added advantages for establishing a holding company, which then owns the various group operating companies in different jurisdictions. Various aspects contribute to considering an ideal holding company location, and a brief discussion is outlined below.

Political stability
Political instability and constant political upheavals cause uncertainty within the jurisdiction and foreign countries that do business with that jurisdiction.

Ease of doing business
This does not specifically refer to actual business done by the company but relates to the associated (support) industries that one may encounter within the jurisdiction. Reputable banking institutions are required for transferring funds and investing capital; and competent service providers who know the industries, laws and practices.

Robust legislative framework
Laws and legal frameworks that allow the broader business plan and its associated structures to function are non-negotiables and the protection of property rights is essential. Beyond this, it is commonplace for many countries to implement (especially tax) laws to the detriment of citizens and resident retroactively. These jurisdictions could be harmful to an estate planning structure.

Ease of doing business with other jurisdictions
Considerations relating to tax- and trade treaty networks, business councils/chambers and foreign-owned company presence is important to ensure that a jurisdiction does not become isolated, and ceases to serve its intended purpose.

Structures and mechanisms to remove risk from the client
Some jurisdictions cater for structures such as trusts or foundations that may remove the inheritance- or capital gains tax burden or forced heirship rules from the business owner’s estate. This minimises tax liability on death, allows for the smooth succession of high-value assets, and ensures that management and control of assets remain central with professionals. Essential estate planning goes hand-in-hand with global expansion.

Substance requirements (laws)
As a requirement of meeting the “compliant” status that is issued by the OECD, jurisdictions have been required to reform and implement “substance laws”. To lay these out shortly, they are essentially a set of laws that ensure that no fraudulent money laundering activities take place through fictitious entities with fictitious members. In terms hereof, any structures that are established are required to meet the substance requirements as follows:

Carry out core income-generating activities in the jurisdiction (depending on which jurisdiction is chosen);
Ensuring that a ‘warm body’ is available to manage structures and that the “post box” effect is eliminated; and
At least a level of expenditure that is proportionate with the investing and management activities of the entity.

Advantageous tax and exchange control laws
A consideration in global expansion is choosing a tax-efficient jurisdiction that has easy-to-comply-with or no exchange control restrictions. These allow for ease in capital deployment, and benefits the owners when profits are derived. Taking advantage of tax-friendly countries to serve global expansion should, however, not be the only consideration.

The above provides only some of the primary considerations for a choice of headquarter location when expanding. It may also be that as part of an expansion, one jurisdiction is more suitable from an estate planning perspective, and another for business purposes, which tends to complicate matters. What is important, though, is a robust framework for the choice of jurisdiction, to ensure that ease of business and expansion efficiency may be possible.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

Transferring assets from persons to companies

Many business transactions are concluded in terms of section 42 of the Income Tax Act. This section essentially allows a transfer of an asset by a person to a company, in exchange for equity shares in that company, allowing for a tax neutral transaction.The South African Revenue Service has recently issued Binding Private Ruling 339, relating to a transaction in which listed shares are transferred to a collective investment scheme (CIS) in exchange for participatory interests in a collective investment scheme. The parties to the transaction are a resident discretionary investment family trust (herein referred to as the Applicant) and a resident CIS as defined in the Collective Investment Schemes Control Act (herein referred to as the Fund).

The facts

The Applicant holds assets which comprise fixed properties and listed shares (amongst other things) that are held as long term investments. In this instance, the current market value of the shares exceeds the base cost. Some shares have been held by the Applicant for more than three years, and some for less than three years. The settlor (also a trustee of the Applicant) of the trust has been managing the investments of the trust, while the administration and stockbroking have been attended to by a separate wealth management company. It has been decided by the trustees to transfer the share portfolio to a CIS to be professionally managed and administered. For this to happen, the Applicant will enter into an agreement to transfer shares to the CIS fund in exchange for a participatory interest in this fund.

Ruling

SARS has confirmed that the transaction in this instance would qualify as an asset-for-share transaction as per the definition in Section 42(1) of the Income Tax Act. It was further confirmed that:

  • Shares held for longer than three years would be regarded as capital assets, and that upon transfer, the participatory interests received in exchange for the shares would be deemed to have been acquired on the dates that the listed shares were acquired;
  • There would be no capital gains tax consequences from the disposal of the listed shares as the Applicant would be deemed to have disposed of the shares for proceeds equal to the base cost, and similarly, to have acquired the participatory interests in the CIS on the dates that the initial shares were acquired, for the same expenditure incurred that is allowable;
  • There would be an exemption on Share Transfer Tax for the proposed transaction.

Observation

If one ignores the potential application of the general anti-avoidance rules which apply to all arrangements, it is unclear why the participants to this arrangement approached SARS for a ruling, since the technical analysis is rather straightforward.

There has recently been an increase in such straightforward rulings issued by SARS. In general (and not suggesting that the parties in this ruling did so) one gets the sense that parties approach SARS for a ruling to avoid any attack on a transaction. SARS is however well within its rights to attack a transaction on anti-avoidance, despite a ruling having been obtained. Parties should, therefore, guard against applying for ruling on seemingly straightforward technical grounds, to avoid any attack on anti-avoidance. Such a strategy may end up being unsuccessful.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

Personal benefit or occupational requirement?

In a recent Supreme Court of Appeal decision, the court had to determine whether the payment by an employer to tax consultants for providing assistance to the employer’s expatriate employees constituted a taxable benefit, as contemplated in the definition of “gross income” in section 1 of the Income Tax Act[1] read with section 2(e) or (h) of the Seventh Schedule.[2]

The taxpayer (in South Africa) belongs to a group of companies that conducts worldwide operations and, as a result, requires their employees to work for short to medium term periods in locations other than in their home countries. The group furthermore operates on a ‘tax equalisation’ basis which is standard practice within the group. This means that the group ensures that the net income of their employees, in whichever countries they are placed, is not less than in their home countries. As part of this arrangement, the taxpayer agreed to take responsibility for the payment of the tax due by expatriate employees of South Africa.

Due to the complex nature of tax legislation relating to expatriates, the taxpayer engaged the services of consulting firms to assist the expatriate employees. This included assistance with registering and deregistering them as taxpayers, the completion of tax returns and dealing with queries and objections to assessments. The taxpayer paid for these services.

The South African Revenue Service (“SARS”) issued additional assessments for the 2004 to 2009 tax years on the basis that the payments to the consulting firms were a taxable benefit in the hands of these employees.

The taxpayer objected to these findings and contended that no advantage had been gained by the expatriate employees by virtue of the use of the consultancy services and the payment by the taxpayer of their fees. The services were procured by the taxpayer in pursuit of the taxpayer’s own tax equalisation policy to ensure that it paid the correct amount of tax.

SARS disallowed the objection and both the Tax Court and High Court agreed with SARS. Upon further appeal, the Supreme Court of Appeal considered the engagement letter entered into between the taxpayer and one of the consulting firms. Although it appeared from the introductory paragraph that the services were rendered to the taxpayer, the description of services clearly indicated the assistance to be provided to the expatriate employees. These were services that the expatriate employees would otherwise have had to pay for personally. The court, therefore, agreed with the court below that these payments constituted a taxable benefit in the hands of these employees.

There are several other relevant considerations that were not dealt with as part of the judgment. It is unclear whether these matters were not in dispute between the parties:

  • Whether output VAT was paid in respect of the fringe benefit (the assumption is that it was not since BMW did not regard the payment as a fringe benefit from the outset) or whether BMW was denied the input tax deduction on the expenses; and
  • Whether the costs incurred were allowed as a deduction in the production of BMW’s income.

The takeaway from the judgement is that when employers incur costs that relate in any way to employees, careful consideration should be made of whether the cost potentially results in a benefit or advantage for the employee that was used for their private or domestic purposes. If this is indeed the case, there are a multitude of potential tax consequences which should be considered.

[1] No 58 of 1962

[2] BMW South Africa (Pty) Ltd v The Commissioner for the South African Revenue Service (1156/18) [2019] ZASCA 107 (6 September 2019)

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

Changing more than your hold

The distinction between amounts received of a capital nature as opposed to a revenue (or income) nature is essential for income tax purposes. Non-capital amounts received, such as from the disposal of trading stock, are subject to tax at a higher effective rate compared to capital profits.

The primary intention with which an asset is acquired is generally conclusive as to the nature of the receipt arising from the realisation of a capital asset unless other factors intervene which show that it was sold in pursuance of a profit-making scheme. It is not uncommon though, that a person’s intention in regard to how they hold an asset, changes from when the asset was acquired, for whichever reason. Such a change in intention could result in unintended tax consequences.

Firstly, for capital gains tax (CGT) purposes, a change in intention to hold assets as trading stock will result in a deemed disposal of the assets on the date immediately before such a change in intention occurs. Such disposal will be deemed to take place at the market value of the assets at that time. The effect of this is that, even though there has been no actual disposal, the difference between base cost and market value of the assets concerned will be subject to CGT. Should the deemed disposal result in a capital gain, it could result in cash flow constraints since there are no actual cash proceeds from which to fund the tax liability which arises.

The second consequence is that the person will be treated as having immediately reacquired the asset at the same market value at which the deemed disposal occurred. After that, for income tax purposes, the cost of the trading stock is deemed to be the market value so that only the profit realised above that value will be subject to normal income tax. Any profit arising on a sale of the assets will therefore only be subject to income tax to the extent that the value of that asset has increased over and above the market value thereof when it became trading stock.

When the opposite occurs (i.e. assets that were previously held as trading stock, but are now to be held as capital assets), a person is treated as having disposed of the asset for an amount which included in that person’s income under the provisions dealing with trading stock, and immediately reacquired that asset for a cost equal to that amount. This cost is treated as an amount of expenditure actually incurred and paid for future CGT purposes.

The amount to be taken into account under the trading stock provisions depends on what the change in use entails:

  • Private or domestic use or consumption: Cost, less any provision for obsolescence. If the cost price cannot be readily determined, use the market value; or
  • Assets which cease to be held as trading stock: Market value

Apart from the income tax consequences, there could also be value-added tax and transfer duty consequences when there is a change in intention to how assets are held. It is advisable that when such an event occurs, the necessary professional assistance is obtained to manage potential pitfalls.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

What You Need to Know about Property Tax

Investing in a property or buying your dream home is an exciting and rewarding experience. But one of the not-so-exciting, but crucial parts of any property purchase is the calculation and payment of one or more different kinds of tax. It is recommended that buyers receive proper advice on which taxes are payable and how much before the purchase, otherwise buying your dream home or investing in a property can become a very unrewarding and financially crippling experience.

So, what is included in property-related taxes? These taxes include municipal rates and charges for refuse and sewerage. We will discuss these taxes in more detail below:

Municipal rates

Most South African property owners must pay municipal rates, which are based on the market value of the property concerned. The calculation of municipal rates was changed in March 2004, when the Government Municipal Property Rates Bill came into play.

Previously, rural areas were charged a higher percentage than the wealthier areas, seeing as lower-income households effectively subsidised wealthier ones. Now, rates are levied at a common percentage (about 1%) irrespective of the value of the property. However, municipalities may levy different rates for different types of properties such as residential, commercial etc. When it comes to sectional title schemes, rates are applied to the entire scheme and are divided among the individual owners.

So how does it work? Your municipality will send you a valuation notice, which states the official value of your property. Using this valuation notice, subtract the specified “rate-free” amount (around R50 000), then multiply this net figure with the percentage of the municipal rate to calculate the annual amount payable. Divide this by 12 to calculate your monthly payment.

Refuse

Just like municipal rates, refuse charges vary from place to place. For example, in Cape Town, there are two parts to the refuse charge:

The first is calculated by subtracting R50 000 from the valuation of the property (same as with municipal rates) and multiplying the result by 0.038%.

The second part is a charge of R38.60 per month for a 240-litre bin with wheels. If your property is valued at less than R100 000, you pay half of the amount mentioned above, and if your property is valued at less than R50 000, you will receive a bin free of charge.

Sewerage

Just as is the case with refuse charges, sewerage is also commonly charged in two parts:

Firstly, a fixed charge of up to R38.00, depending on the value of your property.
Secondly, a variable charge according to your water consumption. See the table below:

Annual Consumption
Charge Per ‘000 Litres

0 – 4,200 litres

4,201 – 14,000 litres
R2.04

14,001 – 35,000 litres
R3.25

So, to break it down a little, if you consumed 200 000 litres in a year, you would pay R650.00 plus the fixed rate.

Before purchasing a property, make sure to consult an expert in order to determine how much you will have to pay in property taxes, and make sure to bring this into your budget before purchasing.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

Calculating your foreign currency capital gain

With the fast approaching 2019 tax season, taxpayers who have realised a capital gain in a foreign currency should take note of the special rules that apply to the translation of those gains to Rand.

Generally, there are two ways of translating a capital gain or loss into Rand –  a “simple method” and a more “comprehensive method”. Under the simple method, the capital gain or loss is determined in the foreign currency and then translated to Rand at the time of disposal. Under the comprehensive method, the expenditure (when acquiring the assets) is converted to Rand at the time it is incurred while the proceeds are translated to Rand at the time the asset is disposed of. The comprehensive method picks up the effect of currency appreciation or depreciation on the cost of the asset.

Paragraph 43(1) of the Eighth Schedule to the Income Tax Act applies when an individual disposes of an asset for proceeds in foreign currency after having incurred expenditure in respect of the asset in the same foreign currency. In these circumstances, the individual must translate the capital gain or loss into the local currency by applying the average exchange rate for the year of assessment in which the asset was disposed of or by using the spot rate on the date of disposal of the asset.

An individual that buys an asset in one foreign currency and disposes of it in another foreign currency must use paragraph 43(1A) to translate the proceeds and expenditure to the local currency as follows:

  • the proceeds into the local currency at the average exchange rate for the year of assessment in which that asset was disposed of or at the spot rate on the date of disposal of that asset; and
  • the expenditure incurred in respect of that asset into the local currency at the average exchange rate for the year of assessment during which that expenditure was incurred or at the spot rate on the date on which that expenditure was incurred.

The term “average exchange rate” (in relation to a year of assessment) is defined in the Income Tax Act as the average exchange rate determined by using the closing spot rates at the end of daily or monthly intervals during a year of assessment. This rate must be applied consistently within that year of assessment.

For ease of reference (although the use of these exchange rates are not compulsory) SARS provides average exchange rates for years of assessment ending on each month since December 2003 for the following currencies: Australian Dollar, Canadian Dollar; Euro, Hong Kong Dollar, Indian Rupee, Japanse Yen, Swiss Franc, UK Pound and US Dollar. (you can get these at the following link: https://www.sars.gov.za/Legal/Legal-Publications/Pages/Average-Exchange-Rates.aspx).

“Spot rate”, in turn, is defined as the appropriate quoted exchange rate at a specific time by any authorised dealer in foreign exchange for the delivery of currency. For spot rates, as well, SARS has a handy tool for rate conversions: https://tools.sars.gov.za/rex/rates/MultipleDefault.aspx.

The conversion of foreign currency gains and losses (primarily when incurred in different currencies), can present a practical difficulty, especially given the volatility of the Rand. Taxpayers are advised to consult with their tax practitioners on the conversion of gains and losses in foreign currency, particularly where these gains and losses are material. Making errors in this regard could lead to substantial penalties.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

Income vs Revenue in the Sale of Shares

The distinction between amounts of a capital nature as opposed to a revenue (or income) nature is essential, and over the years, few other topics have enjoyed so much attention in our tax courts. Although most taxpayers appreciate this distinction, it is essential to revisit the core principles from time to time, to ensure that taxpayers are not caught off-guard when accounting for the tax on the sale of shares.

Non-capital amounts are subject to tax at a higher effective rate compared to capital profits. The difference arises from the annual exclusion that applies to capital gains for natural persons, and the inclusion rate applied to it. In the case of natural persons, the maximum effective rate for capital gains is 18% (compared to 45% on revenue gains); companies are taxed at 22.4% (compared to 28%) and trusts at 36% (compared to 45%).

The departure point for the analysis is how long a person has held the shares. In terms of 9C of the Income Tax Act, 58 of 1962 (the Act), where shares have been held for a period of at least three years, the amount received in respect of the share sale will automatically be deemed to be of a capital nature. Consequently, any gain would constitute a capital gain. Section 9C does not require an election, and its application is automatic and compulsory. Importantly, profits on the disposal of shares held for less than three years is not automatically of a revenue nature. The nature of such profits must be determined using the general capital versus revenue principles. Apart from the three-year holding rule in section 9C, the Act does not provide objective factors to distinguish between capital and revenue gains on share disposals. General principles for making this distinction have been formulated in courts over many years.

A person’s intention (both at the stage of purchase and disposal) is the essential factor in determining the nature of profits. If shares were acquired with mixed intentions (bought partly to sell at a profit and partly to hold as an investment), the person’s intention would be determined by the dominant or main purpose. South African courts have held that a taxpayer’s evidence as to intention must be tested against the surrounding circumstances of the case, which include, amongst other things, the frequency of transactions, method of funding and reasons for selling.

Where shares have been purchased and sold as part of a profit-making scheme, gains will be regarded as revenue in nature. In this regard, although not conclusive, the frequency and scale of share transactions is an important consideration. Where shares are bought regularly for the main purpose of resale at a profit, it will be regarded as trading stock and profits will be revenue in nature. An occasional sale of shares yielding a profit suggests that a person is not a share trader engaged in a scheme of profit-making. Where profits have been made through the mere realisation of investment, there is no scheme of profit-making. Although it is possible that a once-off venture involving the acquisition of shares can comprise a venture resulting in the shares becoming trading stock, the “slightest contemplation of a profitable resale” is not necessarily determinative for a gain to be revenue in nature.

Profits on the disposal of shares acquired for long-term capital growth and dividend income will more likely be capital in nature. Shares sold for a profit very soon after the acquisition is, in most cases, an indication of the potential revenue nature of those profits. However, that measure loses a great deal of its importance when there has been some intervening act, for example, a forced sale of shares.

Taxpayers are encouraged to take careful note of the distinction between income and capital gains since a different interpretation by SARS could result in a lengthy (and costly) dispute.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

Farming operations in South Africa and the tax implications thereof

Farming in South Africa is like second nature to most South Africans, but the tax implications on farming operations seem to raise some questions when determining a taxpayer’s taxable income. The taxation of farming operations is subject to a unique set of taxation rules. SARS requires that all income and expenses relating to farming operations be separately disclosed so that they can easily assess whether the specific tax rules have been adhered to.

The expression “farming operations”, is not defined in the Income Tax Act and should be interpreted according to its ordinary meaning, which according to Merriam-Webster dictionary is the science, art, or practice of cultivating the soil, producing crops, raising livestock and in varying degrees the preparation and marketing of the resulting products.

Section 26(1) of the Income Tax Act stipulates that the taxable income of any person carrying on pastoral, agricultural or other farming operations shall, in so far as the income is derived from such operations, be determined in accordance with the Act but subject to the First Schedule.

The First Schedule deals with the computation of taxable income derived from pastoral, agricultural or other farming operations. This schedule applies regardless of whether the taxpayer derives an assessed loss or a taxable income from the farming operations.

Furthermore, The First Schedule applies to any person who derives a taxable income from above-mentioned farming operations. The person could be an individual, a deceased estate, an insolvent estate, a company, a close corporation or a trust.

On the other hand, not all activities in farming constitute farming operations. Thus, in order to fall within the First Schedule, a farming operation needs to be the trade of the taxpayer and there must be an overall profit-making intention. If the activities carried out are only for the benefit of the individual, without the prospect of making a profit, the individual will not be carrying on farming operations.

The taxable income that is derived from farming operations is combined with the taxable income from any other sources to arrive at the relevant taxpayer’s taxable income for the applicable year of assessment.  If a loss is created, during the year of assessment, in the production of farming income, this specific loss should be carried over to the next financial year. The loss can only be utilised by income-generating activities that are in the production of farming income.

In conclusion, it is essential to determine the nature of farming activities and whether these activities are farming operations. If so, the First Schedule deals with the calculation of the taxable income.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

Usufructs and tax consequences

A usufruct is a limited real right in property. The usufruct construct takes the form of a common-law personal servitude, which, as a limited real right, grants the holder (the usufructuary) the right to use someone else’s property, including the fruits. Typical examples include where someone is granted the right to use a house, or the right to receive interest on a loan account or dividends on shares. While the right to use the asset is granted to a person, the ownership, or bare dominium of the property, does not transfer to the usufructuary. The usufructuary merely receives the right to the enjoyment of an asset. The use of usufructs has several tax consequences, one of which occurs when a usufruct is created upon death.

A usufruct created under a testament will trigger a part-disposal for capital gains tax (CGT) purposes in the hands of the testator if the usufruct is bequeathed to the surviving spouse while the bare dominium is bequeathed to another person, such as a family trust. In these circumstances, there will be a disposal of the bare dominium to the deceased estate while there will be a roll-over to the surviving spouse.

When the testator directs that a usufruct is to be created upon his or her death and neither the usufruct nor the bare dominium in the asset is bequeathed to a surviving spouse, there will be a disposal of the full ownership in the asset to the deceased estate and the executor will dispose of the usufruct to the usufructuary and the bare dominium to the bare dominium holder.

Usufructs created upon the death of a person (i.e. where someone is granted a usufruct of an asset which the deceased owned) must be valued (to “split” the market value of the total ownership between the usufruct portion and the bare dominium portion). This valuation involves determining the present value of the annual right of use at 12% a year over the expected life of the person receiving the benefit, or when the right of enjoyment is a lesser period, over that lesser period. If the asset subject to the usufructuary interest cannot reasonably be expected to produce an annual yield of 12% on the value of the asset, SARS must decide, on application by the taxpayer; such sum as reasonably represents the annual yield. This could, for example, be the case where a usufructuary is granted the usufruct over a loan account, and 12% interest (in the current economic circumstances at least) cannot be expected to be a fair representation of the annual yield.

On an oversimplified basis, where a usufruct is created upon death, and the bare dominium is bequeathed to a trust, subject to a usufruct by a surviving spouse, the following tax consequences will ensue:

A split of the market value (and base cost) of the property is required, in line with the above valuation. There will be a deemed disposal of the bare dominium in the deceased’s hands at market value at the date of death. Since the usufruct has been left to a spouse, there is a roll-over in respect of that asset.

The tax consequences of a usufruct created upon death are very complex, and advice the correct treatment thereof should be obtained from a specialist in the field.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)