CGT on fractional re-sales?

The rapid growth in fractional ownership sales has raised questions about the tax implications of this relatively new type of property ownership.The thorny taxation issue becomes particularly relevant now that the industry is starting to establish a strong secondary or resale market.

Mike Teuchert, partner at auditing firm Grant Thornton, says the owner of any kind of holiday accommodation – whether it’s timeshare, sectional or fractional title – will be subject to tax on the sale thereof.

However, the type of tax will be dependent on the intention of the owner at the time of purchase. Teuchert says it’s by no means conclusive that merely because one acquires a share in a fixed property that the profit at resale will be subject to Capital Gains Tax (CGT).

Whether CGT or normal income tax comes into play will, in short, depend on whether one bought the holiday accommodation purely for its potential resale value (to earn a capital gain) or for holiday/rental purposes.

Teuchert says if the South African Revenue Services (SARS) believes that you bought into a fractional ownership property with the intention of reselling it, any profit gained from the resale could be regarded as being of a revenue nature. In that case, the entire nett proceeds of the sale will be subject to income tax.

However, if the intention was to buy the property for bona fide holiday purposes or to earn a rental income, there is an argument to be made that the proceeds of the sale would be of a capital nature. Teuchert says that means the nett proceeds will then be subject to CGT.

The exact CGT liability will depend on the size of the profit (or loss) made at resale, but fractional ownership sellers will probably be paying less tax in terms of CGT than what the case would be if they were liable for normal income tax.

But Teuchert points out that the intention of a taxpayer is, of course, a subjective test. Factors that would be considered by SARS include how long the fractional ownership asset is held, availability of the necessary finance, the nature of the taxpayer’s business and the reason for the sale. – Joan Muller 

Article from Property24