Divorce can sometimes be an ugly word but like everything else in life, it happens. Emotional and practical implications aside, when divorce does happen, the parties involved either have to agree on how their assets will be split between themselves, or a court will order a certain division of assets to apply. That seems straightforward enough, right? Not exactly. Things can get a little complicated if you want to split and you’re South Africans living abroad. Let’s take a look at the tax implications on a divorce settlement in South Africa
Separating assets at the time of divorce has capital gains tax (CGT) implications for those who are party to the divorce. Additionally, there are tax-free roll-over provisions that apply to spouses who are divorced or separated, where the legal requirements are met.
What are the legal formalities for divorce?
|Type of marriage
|Legal formalities required for tax-free rollover
|Civil marriage/customary union recognised by law.
|Agreement of division of assets which has been made an order of the court.
|Permanent same sex or heterosexual unions
Tax implications of divorce in SA: what is rollover relief?
Divorce often results in the transfer of assets between spouses. In ordinary circumstances, the transfer of assets would count as a disposal thereof, which could count as a CGT trigger event. However, certain transfers between spouses are exempt from CGT. In the case of dissolution of marriage, “roll over” relief can be granted where assets are transferred between spouses. Here, the relief is that there is no CGT triggered on the transfer of the asset as the spouse receiving the asset is treated as having gained the asset at the same time, at the same cost, in the same currency and for the same use as the transferring spouse.
In other words, the spouse receiving the asset simply steps into the same shoes as the original owner (the other spouse). CGT is ‘rolled over’ or delayed until the asset is disposed of to a third party outside of the marriage/divorce scenario.
It is important to point out that this relief only applies where the recipient spouse is a tax resident of South Africa or, if the spouse is now a tax non-resident, the assets are immovable property, or assets that relate to a business operating in South Africa.
In most cases, this rollover relief is of huge help, as it delays the trigger of CGT on assets transferred between spouses until that asset is disposed of to someone else. However, in certain divorce cases there can be unexpected CGT exposure in the hands of the spouse receiving the asset.
- If the primary residence is transferred between spouses, the receiving spouse can use the full R2 million CGT exclusion.
- Where a second property or holiday home is transferred to a spouse in a divorce settlement, which is then used as a primary residence, the receiving spouse will need to pay CGT on the subsequent disposal of that residence and will not be entitled to the full R2 million primary residence exclusion on disposal.
- Where immovable property is used as both a residence and a location for carrying on a trade or business, and this property is transferred to a spouse as a result of divorce, the recipient spouse will be exposed to CGT and the primary residence exclusion will be pro-rated depending on the split between residential and non-residential use.
The tax implications of divorce in South Africa: non-resident spouses and anti-avoidance
The South African Revenue Service has an anti-avoidance measure that prevents a tax-free roll-over from being used by a non-resident spouse except in the case of:
- Immovable property situated in South Africa or any interest or right of any nature in such property; or
- Any asset effectively connected with a permanent establishment in South Africa.
Since these assets fall within the tax jurisdiction of South Africa even for non-residents, there is no need to preclude them from roll-over relief.
SARS makes use of an example on their website to illustrate their point: Bruce and Sheila have plans to immigrate to Australia. Sheila has no CGT assets and is the first to relocate to set up their new home in Perth. After she has left, Bruce transfers his assets to Sheila.
|Holiday home in Plettenberg Bay
|R1 000 000
|R2 000 000
|R2 500 000
|R5 000 000
Outcome: Bruce must pay CGT on the capital gain of R2 500 000 on the transfer of the shares, while Sheila will be liable for CGT only when she disposes of the Plettenberg Bay property.
Tax implications of divorce in South Africa: retirement savings
One asset often involved in divorce proceedings is the accumulated pension fund of one of the parties. There is often a dispute as to how much is to be paid out to the non-member spouse, as well as what the tax implications of such a payment will be, as well as who is responsible for bearing the tax implications thereof.
A withdrawal from a pension fund, even in terms of a divorce order, is considered a “retirement fund lump sum withdrawal benefit” for purposes of the Income Tax Act.
- The amount paid to the non-member spouse is included in their gross income and they will be taxed on the withdrawal (and not the member spouse).
- This tax is not calculated according to “normal” sliding scale tax rates applied to individuals, as lump sum payments from retirement funds are taxed in their own right, depending on whether money is paid as a “retirement fund lump sum benefit” (where a member has died or retired) or a “retirement fund lump sum withdrawal benefit” (where the fund benefits are accessed before retirement).
- Early withdrawal payments are taxed at a higher rate than they would be if paid out after retirement. Lump sum amounts paid out as part of divorce settlements are taxed in accordance with the below table:
2024 tax year (1 March 2023 – 29 February 2024)
|Taxable income (R)
|Rate of tax (R)
|0 – 27 500
|27 501 – 726 000
|18% of taxable income above 27 500
|726 001 – 1 089 000
|125 730 + 27% of taxable income above 726 000
|1 089 001 and above
|223 740 + 36% of taxable income above 1 089 000
It is important to point out that this table operates with cumulative effect, which takes into account all previous lump sum payouts received by the person.
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