When a couple decides to get divorced, there are a lot of decisions that need to be made. One of the most important is how the divorce will affect their taxes. Fortunately, there are professionals who can help guide you through this process and make sure you’re taking all the necessary steps to protect your finances. This article will provide an overview of some of the tax implications of getting divorced in South Africa. Keep in mind that everyone’s situation is unique, so you should always consult with a tax specialist to get specific advice for your own case.
When resolving contentious divorce problems, divorcing spouses or their attorneys often ignore tax. Even before the divorce settlement has been finalised, failing to consider the tax ramifications of one party’s support responsibilities toward the other can have disastrous results.
In South Africa, the Divorce Act gives courts wide discretionary powers to order maintenance payments and asset division if an agreement cannot be reached between parties. In many cases where one spouse’s needs are not met by their former family members’ settlement or retirement funds; they may request a fair amount from court for themselves instead which could include paying capital sums as well transferring various assets in order meet those urgent financial demands–this has given rise therewith much litigation because what might seem like reasonable among friends/family members could differ greatly depending on whose perspective you take! There have also been several judgements handed down through time that attest just how intricate these types of arrangements can get.
If a disposition in a divorce settlement potentially exceeds the donee spouse’s maintenance needs, donations tax may become unexpectedly relevant. The donations tax provisions in the Income Tax Act provide that where there is a disposal which was not gratuitous, but the consideration was inadequate, there is a deemed donation. Donations tax is payable on the value of the property disposed of by a donor after deducting the general exemption. The Income Tax Act further stipulates that donations tax is not due in relation to so much of any bona fide gift made by the donor toward the upkeep of any person as the Commissioner thinks reasonable.
In order to fulfil his maintenance obligations to the other spouse (typically the wife) and the minor children born of the marriage, a spouse (typically the husband) may agree in a divorce settlement or be required by the divorce court to purchase an immovable property, either in his own name or through a trust. The usufruct could be for a specified duration, such as until the youngest child reaches the age of majority, or it could be for life without any conditions with the condition that it ends upon her remarriage. The termination of a usufruct due to a wife’s subsequent marriage may have Capital Gain Tax repercussions for the former husband that were not foreseen by the parties when the divorce settlement was reached. A limited interest must also generate “proceeds” in order for Capital Gain Tax liability to result from the disposition of that interest. Gains and losses are both considered forms of proceeds. When the ex-usufruct expires, for instance because a defined term has passed, she typically won’t receive any proceeds, and there won’t be any Capital Gain Tax obligations. However, that may not necessarily be the case where the property underlying the limited interest has increased substantially in value or where the usufructuary spouse’s right has terminated due to her remarriage or where the new usufructuary or the bare dominium holder is a connected person to the former spouse and the extinction of the usufruct is due, for example, to the remarriage of the former usufructuary spouse.
As can be seen, there are a number of tax implications that are inherent in divorce settlements. For this reason, it is important for the legal practitioner to be aware of these implications and to ensure that their clients are fully informed as well. If you need assistance with understanding or navigating the tax implications of divorce settlements, please do not hesitate to contact us. We would be happy to help.