The question received reads as follows:
I would like some clarity regarding "connected persons". We have a situation whereby a residential property is owned by 2 close corporations (each with 2 members) in equal shares. The members of CC1 are the parents of the members of CC2. One of the members of CC2 uses the property as her primary residence. The clients, being CC1 and CC2, want to use the provisions of Paragraph 51 to transfer the property to the member ordinarily residing in the property. Can this be done?
While the answer given reads as follows:
In terms of paragraph 51A of the Eight Schedule to the Income Tax Act the ultimate qualifying acquirer is one or more natural person(s) who ordinarily resided in the residence from 11 February 2009 until the date of acquisition, who used it mainly for domestic purposes and who were connected persons in relation to (in your case) the Close Corporation.
From the above it is clear that there are 3 basic requirements in order for a transaction to qualify for the tax relief granted by paragraph 51A namely:
1. The ordinarily resident requirement
- the "ordinarily resident" requirement
- the "domestic use requirement", and
- the "connected persons" requirement
The term "ordinarily resident" is not defined in the act and therefore the common law principles are used to determine whether a person ordinarily resides in a residence. A person's ordinary residence would be the place to which he would naturally and as a matter of course return to from his wanderings. Using a property as your primary residence would constitute compliance with the ordinarily resident requirement.
2. The domestic use requirement
A qualifying residence must be mainly used for domestic purposes during the period from 11 February 2009 to the date of disposal by the Close Corporation. The word "mainly" prescribes a purely quantitative standard of more than 50% and the measurement of domestic usage will normally be determined on a floor-area basis. Whether the "domestic use" requirement is complied with will therefore be determined by whether more or less than 50% of the floor area was used for domestic purposes or not.
3. The connected persons requirement
The natural persons who ordinarily reside in the residence and have been using it mainly for domestic purposes must also be connected persons in relation to the Close Corporation.
The act quite clearly defines who qualifies as connected persons in relation to a Close Corporation, namely:
- Any member of the Close Corporation;
- Any relative of a member of the Close Corporation;
- Any Trust which is a connected person in relation to a member of the Close Corporation;
- Any other Close Corporation or Company which is a connected person in relation to a member of the transferring Close Corporation or a relative or trust which is a connected person in relation to the member of the transferring corporation.
Every member of the Close Corporation is therefore a connected person in relation to the Close Corporation irrespective of the size of their member's interests. Therefore all four of the members in your scenario are considered to be connected persons.
My question to you is whether they are purporting to transfer the property only to the member who uses it as a primary residence or to all of the members in equal shares? Remember, an ultimate qualifying acquirer of a residence is one or more
natural persons who ordinarily resided in the residence from 11 February 2009 until the date of acquisition, who used it mainly for domestic purposes and who were connected persons in relation to the Close Corporation.
Nowhere in the guide does it mention that if there are more than one member then transfer have to be effected to all of them, which leaves me to think that even if there are multiple members, transfer of the property can be effected to any number of members (even to only one of them), provided that the transferee(s) comply with all three requirements. The only person who qualifies as an acquirer in your case is the member who uses it as her primary residence. The rest all fall short on the ordinarily resident requirement. The answer to your question would therefore, in my opinion, depend on who transfer is to be passed to.
The guide also only deals with the scenario where the property is held by only one entity and I am not sure whether your scenario (where the property is held by two entities) would disqualify the transaction or not.
I have to say that the above information is only based on my interpretation of the guidelines and must by no means be regarded as gospel. I would strongly suggest that one obtains advice from SARS in this regard and if anyone has received a directive from SARS, could you kindly share it with us as I am sure that there are many practitioners out there who would appreciate some clarification on the subject.
Nadia de Kock