Tax on Spouses Married in Community of Property

TAX TREATMENT OF SPOUSES MARRIED IN COMMUNITY OF PROPERTY 

South African tax residents are taxed on amounts received or accrued to them. However, individuals married in community of property may have a tax liability in respect to amounts received or accrued to their spouses.

Section 7(2A) of the Income Tax Act deals with income received or accrued to a spouse married in community of property. It states that both spouses are taxed equally on their investment income, such as interest, dividends, and rental income since the underlying assets are owned jointly. Each spouse is obliged to declare 100% of the investment income in their individual income tax returns, whereafter it will be split automatically when SARS processes the return. Therefore, it is crucial that not only the 50% be declared, as this will further be reduced to 25% of the investment income, leading to understatement penalties and interest.

Section 7(2A) of the Income Tax Act further states that trading income accrues to the spouse who earns it, and where both spouses conduct the trade, it accrues to each spouse in the proportion determined by them in terms of an agreement between them.

Capital gains received or accrued to a spouse married in community of property are dealt with in paragraph 14 of the Eighth Schedule to the Income Tax Act and states the spouses are taxed equally regarding the disposal of assets jointly owned.

However, the situation is more complex when an amount is received by or accrues to a spouse by virtue of being a beneficiary of a discretionary trust. The question arises of how the non-beneficiary spouse is taxed on amounts vested in the beneficiary spouse of that trust.

Section 25B of the Income Tax Act determines that when the trustees of a trust vests an amount in a beneficiary, that amount is deemed to have accrued to the beneficiary. The amount is  to have accrued to that beneficiary directly and will retain its nature and follow the rules set out in section 7(2A) of the Income Tax Act.

Paragraph 80 of the Eighth Schedule to the Income Tax Act states that any capital gain vested in a beneficiary of a trust is taxed in the hands of that beneficiary. Interestingly, the capital gain is not split between the spouses married in community of property since paragraph 14 of the Eighth Schedule only applies to assets jointly owned.

Extreme caution must therefore be taken in the case of calculating and declaring the taxable income of spouses married in community of property.  Each case should therefore be evaluated on its own set of facts.