Your Property and Capital Gains Tax

01 March 2021 623

Primary residence rebate essentially permits an exclusion on Capital Gains Tax for the first R2 million in the disposal of your primary home. For example, if you sell your primary home for R3 million, you will only pay Capital Gains Tax on R1 million.

 

So what is a primary residence? It is defined in paragraph 44 of the Eight Schedule to the Income Tax Act [1] as the place where someone (a person, excludes trusts, companies and closed corporations) ordinarily resides and it must have been used mainly for domestic purposes. This definition however, does raise a few questions. What qualifies as “mainly domestic purposes`’ – this was discussed in the court case SBI v Lourens Erasmus (Eiendoms) Bpk [2]. Botha JA interpreted mainly to  imply a purely quantitative standard of more than 50%, and that this 50% can be measured on a floor basis or a time basis. However, each case should be evaluated on its specific facts. Meaning that the lifestyle a person leads will be used to evaluate if a certain property is in fact his/her primary residence.

Let’s evaluate this using an example:

Mrs Y operates her marketing business from her home. She spends Mondays through to Saturdays at home working. Therefore, according to Botha JA in the above-mentioned decision, this will disqualify her house from a primary residence rebate because she spends more than 50% of her time at home operating her business. I do not wish to entertain the inevitable questions relating to working remotely because of COVID-19, but one can see how this definition of ‘mainly domestic’ can have unforeseen consequences.

 

It is important to note that certain exclusions do exist. For example, the primary residence rebate does not apply to properties of more than two hectares and the property must have been used together with the primary residence for domestic purposes. For larger pieces of land that were not used for private domestic purposes, the capital gain will have to be apportioned.



[1] 58 of 1961

[2] [1966] 28 SATC 233 at 245

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