Transfer of assets between spouses: What are the tax implications?

Section 9HB of the Income Tax Act provides for a roll-over of a capital gain or loss when an asset is transferred between spouses during their lifetimes. The roll-over is mandatory, and spouses do not have the option to elect out of it. The policy rationale for the roll-over is that the transferor spouse must benefit from not immediately having tax exposure on a transaction since the transferee spouse will pay the downstream tax when they eventually dispose of an asset, or when it becomes part of the estate.

Importantly, the roll-over relief in section 9HB will not apply when a person disposes of an asset to a spouse who is not a resident.

On a practical level, the relief works as follows:

  • The disposing spouse (transferor spouse) must disregard any capital gain or loss when disposing of an asset to his or her spouse (transferee spouse).
  • The transferee spouse takes over all aspects of the history of the asset from the transferor spouse. The transferee spouse is deemed to have:
    • acquired the asset on the same date that the asset was acquired by the transferor
    • incurred an amount of expenditure equal to the expenditure that was incurred by the transferor in respect of that asset
    • incurred that expenditure on the same date and in the same currency that it was incurred by the transferor
    • used that asset in the same manner that it was used by the transferor

Notably, apart from outright transfers, the following events are treated as disposals between spouses:

(a) A deceased spouse

In the event of the death of one spouse, the resident surviving spouse must be treated as having disposed of an asset to that spouse immediately before the date of death – if the deceased estate of that spouse acquires ownership of that asset in settlement of a claim arising under the Matrimonial Property Act.

(b) A divorce or court order

A person must be treated as having disposed of an asset to his or her spouse if that asset is transferred to that spouse in the following cases:

  • Divorce
  • A religious marriage or civil union, where an agreement of division of assets has been made an order of court.

The special rules under section 9HB must be considered to determine the tax implications when a person disposes of an asset to his or her spouse. While providing for a roll-over of a capital gain or capital loss when an asset is transferred between spouses during their lifetimes, it also ensures that a resident spouse to whom an asset is disposed of, takes over all aspects of the history of the asset from the transferor spouse.

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)

Interest: SARS’ View on the In Duplum Rule

The in duplum rule originated from the South African common law and has been applied through South African case law for over 100 years. The rule aims to protect borrowers from exploitation by lenders that allow and, in some cases, cause interest to accumulate unabated: leading borrowers into further indebtedness. In terms of the common law, the interest charged on a debt stops to accrue where the total amount of the unpaid interest equals the outstanding principal debt. The statutory rule goes further in its application. It provides for a limit on several costs, in addition to unpaid interest, which added together may not be more than the outstanding principal debt.

Taxpayers sometimes enter into loan arrangements with parties, where the lender that is advancing that loan to the borrower (who is in some manner related party to the lender) will advance the loan at a zero or low-interest rate for the loan arrangement to be favourable to the related party by saving on interest costs. The use of these zero or low-interest loans creates a loss to the fiscus as it often leads to for example:

  • Less PAYE collection where an employer grants a zero or low-interest loan to an employee.
  • Avoidance of donations tax where a person transfers an asset to a trust in exchange for a zero or low-interest loan.
  • Possible avoidance of dividends tax where a company grants a shareholder a zero or low-interest loan.

To counter the tax benefit as a result of the use of zero or low-interest loans, the Income Tax Act contains various anti-avoidance rules that deal with the taxation of the difference created because of these loans. One example is section 7C of the Act, which applies in respect of zero or low interest-free loan advanced to a trust by a connected person of that trust. The official rate of interest is used under this provision to quantify a donation that arises from advancing a zero or low-interest loan to a trust.

Previously, some taxpayers were relying on the in duplum rules to circumvent anti-avoidance rules in the Income Tax Act. These taxpayers rely on the in duplum rules to distort the quantification of the tax benefit derived from a zero or low-interest loan between connected parties on the difference between the amount of interest actually incurred and the amount of interest that would have been incurred at the official rate. These taxpayers claim that if a zero or low-interest loan is advanced and the unpaid interest on that loan (and other costs, in the case of the statutory rule) reaches the amount of the unpaid principal debt, the in duplum rules apply to stop the interest. Consequently, if the in duplum rules apply, then the application of the anti-avoidance rules on the tax benefit on zero or low interest-free loans must also not be applied.

However, section 7D of the Income Tax Act determines that the anti-avoidance rules dealing with zero or low interest-free loans should apply despite the application of either the statutory in duplum rule or the common law in duplum rule. Taxpayers should therefore be cognisant of any interest provisions in agreements, and that anti-avoidance mechanism will receive preference.

This article is a general information sheet and should not be used or relied on as legal or other 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).

When shares become assets

Many business transactions are concluded in terms of section 42 of the Income Tax Act. The section essentially allows a transfer of an asset by a person to a company, in exchange for equity shares in that company, allowing for 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 of fixed properties and listed shares (amongst other things) which 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 attach 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 on as legal or other 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)