… and SARS is looking at your horse and carriage …
The late Robin Williams, in his role as Reverend Frank in the movie Licence to Wed, has put together what is probably the most, shall we say, ‘innovative’ marriage course ever devised. I mean, if your marriage can survive blindfold driving, learning to ‘fight fair’, and the little Hitler from the ‘Ministers of Tomorrow’ programme, then it will last forever.
However, as brilliant as this pre-marriage preparation may be, it is unfortunately incomplete, in that it doesn’t cover tax. Granted, the South African Revenue Service (SARS) doesn’t exactly make for great cinema (unless Leon Schuster does one of his ‘Shucks’ pranks involving some idiot going to a SARS office and asking them for a ‘Tax Evasion Form’), but unfortunately us plebs that don’t live in La La Land need to take the tax man into account in every decision that we make – including marriage.
But first we need to understand what SARS means by the term ‘spouse’, since the definition contained in Section 1 of the Income Tax Act is wider than the average person would think. For instance, while it may be obvious that your spouse would be any person to whom you may be married in terms of South African law, religious practices, or customary / traditional rites of union, the definition goes wider to include any union – whether same-sex or heterosexual – that the SARS Commissioner considers is intended to be permanent.
This means that if you are living together in what is effectively a ‘paperless marriage’, sharing a common home with pooled resources, the tax man will regard you as ‘spouses’. But so what? What bearing does your marital status have on tax? Isn’t everybody taxed individually, nowadays? The answer is yes – except when it comes to investment and trade income, as well as Capital Gains Tax. And the key is whether any so-called ‘community of property’ exists.
‘In community of property’
In terms of South African legislation, any union conducted under either the Marriage Act or the Civil Unions Act is automatically ‘in community of property’ unless the parties to the union contractually agree otherwise. For such contractual agreement to be of legal force, it needs to be notarised and registered at the Deeds Office.
In simple terms, a union ‘in community of property’ means that, as far as assets are concerned, “what’s mine is yours and what’s yours is mine”. In other words, the spouses legally have joint ownership over all their mutual assets, excepting those inherited assets where a will has specified otherwise.
From a tax point of view, any income that arises from such assets, such as interest on a fixed deposit, or rental from a property, is split between the spouses for tax purposes. While each spouse accounts for the full amount of income on their tax return, SARS only takes 50% into account – provided that you have marked on the form that you are married in community of property. If this box is not ticked, SARS will tax both spouses on the full amount!
When such an asset is sold, each spouse must account for the full capital gain realised. However, such gain is also split 50/50, and as a result each spouse will benefit from the basic R40 000 annual exclusion.
‘Out of community of property’
For unions conducted ‘out of community of property’, there is no joint estate – legally, ‘what’s mine is mine, and what’s yours is yours’. All income and capital gains are thus taxed on an individual basis, as though the parties concerned were single.
In the case of marriages or customary unions conducted in terms of the relevant South African legislation, community of property needs to be contractually excluded by means of a notarised and registered ante-nuptial contract. From a tax point of view, it makes no difference whether such contract incorporates the accrual system or not, since any accrual only comes into force upon dissolution of the marriage.
Under the Section 1 definition of ‘spouse’, unions recognised as marriages in terms of religious practices are deemed to exclude community of property, unless proof to the contrary is provided. However, this only applies to religious ceremonies performed by an official who is not registered with the Department of Home Affairs as a marriage officer. Religious ceremonies conducted by registered marriage officers usually (but not always) cover the civil ceremonial requirements as well. If in doubt, obtain clarification from the religious official concerned.
In the case of same-sex relationships, the Civil Unions Act provides for community of property as a default unless this is excluded contractually. However, community of property is excluded in unions (whether same-sex or heterosexual) that are not formally registered under any legislation.
From a tax point of view, each spouse declares income arising from their own investments only, and also only accounts for capital gains realised on the disposal of assets owned in their individual capacity. Unlike the case where community of property applies, there is no pooling of assets or investment income.
The usage of the term ‘partnership’ in this paragraph refers to the word in a business sense, i.e. where two or more people form an arrangement whereby a joint trade is carried out. Investments may also be made under the framework of a partnership, and many property investments are made in this way.
While it is prudent business practice to have a contract drawn up setting out the terms of the agreement, it is critical from a tax point of view that such an agreement sets out the agreed division of income, as well as the percentage ownership of the underlying assets by each partner. The two need not be the same. SARS will then tax such income according to the contractual agreement, and similarly, the agreement will determine the proportion of realised capital gain that each partner must account for.
Partners in a union where community of property is excluded may also form a partnership for the purposes of trade, such as joint investments or ownership of property. However, this would be on the same basis as that applicable to partners not regarded as ‘spouses’, and SARS is likely to require documentary evidence of a bona-fide partnership (such as a written contract).
Partnerships formed between spouses married out of community of property will also receive scrutiny from SARS to ensure that no impermissible tax avoidance is taking place. For example, a rental property where one spouse is solely responsible for the financing and management thereof will have a hard time convincing SARS that the other spouse is a ‘partner’ in such a venture!