Tax treatment of spouses married in community of property

In South Africa, your marriage is automatically assumed to be in community of property, unless you enter into an antenuptial contract. The choice of which marriage contract to enter into will govern how your assets and liabilities will be divided upon divorce or death.

Taxpayers who are married in community of property are taxed on half of their interest, dividends, rental income, and capital gains. SARS can now retrieve your “Married in community of property” status from the taxpayer’s previous declaration in collaboration with the Department of Home Affairs to confirm marital status. Where the spouses are successfully matched and have interest investments, SARS will replicate the interest investment certificate on both spouses’ return where they will be taxed on a 50% portion upon assessment.

Where a match between SARS and Home Affairs is confirmed, the spouses will be linked as follows:

  1. If investment income is identified for a taxpayer based on third-party data received (e.g. IT3(b) certificate for interest earned), the third-party data will also be prepopulated on the spouse’s return if the spouses are linked on the SARS system.
  2. The investment income will be apportioned accordingly and will reflect on the notice of assessment (ITA34) issued to each spouse, upon assessment.

Note: Where applicable, the spouse who is not registered for tax may be routed for Auto Registration.

Taxpayers married in community of property may opt to exclude certain income from the communal estate. In previous tax years, one communal estate indicator was displayed per applicable container/subsection of the return, and if the taxpayer selected the indicator it applied to the whole income amount declared in that part of the return (e.g. total local interest or total foreign dividends).

From the 2023 year of assessment, the taxpayer can select the communal estate indicator on a transactional level (i.e. for each institution from which the income was received). This change applies to the following containers/subsections of the return:

Local interest
Foreign interest
Foreign tax credits on foreign interest
Gross foreign dividends subject to SA’s normal tax
Foreign tax credits on foreign dividends
Distributions from a Real Estate Investment Trusts (REIT) /Taxable Local Dividends
Capital Gain/Loss
Local Rental Income

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.

IN COMMUNITY OF PROPERTY:
If you are married in community of property, this means that current and future assets are shared equally.

The law regards you as equal partners in an estate. You pay your own tax on your salary and benefits like travel allowances, but each pays half of the tax on investments and capital gains. Both of you declare the full income on your tax return and SARS takes 50% from each. Just be sure to tick the box that says you’re married in community of property, or you’ll both be taxed the full amount.

The same goes when you sell an asset like a (non-primary residence) house. The capital gain is also split for tax and both partners get the basic exemption.

When marrying in community of property, you and your spouse share everything equally, including assets and debts. This means if your spouse incurs a large debt, you are jointly liable. If they fail to pay back the debt, the creditor can insist you pay back the debt.

You will need to get your spouse’s permission to take out credit or a home loan, to sell a large asset, or to stand surety for a loan. This is to ensure you don’t become liable for your spouse’s debt without your knowledge.

Inheritances are included unless the will for which you are inheriting specifically excludes the inheritance. This means that your spouse will share the inheritance jointly with you should you get divorced. Upon divorce, your assets are split equally, which means the house you live in would need to be sold unless one spouse agrees to pay the other spouse half of the house value.

OUT OF COMMUNITY OF PROPERTY:
Out of community of property requires an ante-nuptial agreement to make it legally binding. If it’s without accrual, you keep what you came with and also anything you gain during the marriage. You and your partner are taxed separately on all income.

The same applies to liabilities and one partner’s creditors cannot touch the other’s income.

OUT OF COMMUNITY OF PROPERTY – WITH ACCRUAL:
In simple terms this means, what was yours before the marriage remains solely yours, However, all assets & liabilities accumulated during the marriage, are shared equally between the two spouses.

Getting married out of community of property with the accrual system, you have the ability to structure it to the needs of your future financial goals as a couple. You can decide to exclude some wealth, such as specific assets named in the contract or inheritances by making your starting value at marriage that of the value of the inheritance in your name at the time. The main concept is that upon death or divorce, the spouse whose estate shows no accrual (growth), or smaller accrual will have a claim against the spouse whose estate has grown more. This claim can only be equal to half of the difference between the two estates.

SARS does not recognise the ‘Accrual system’. It is either In or Out of community of property.

The only exception will be when the asset that is generating the income is registered under both names (irrespective of how married) of the partner(s) when the income will be split between the partners.

WITHOUT ACCRUAL

Choosing to conclude an ante-nuptial contract without accrual means that each spouse’s estate (assets and liabilities) prior to getting married belongs to each spouse exclusively. In the event of divorce or death, the phrase “what’s mine is mine and what’s yours is yours” is applicable. Neither spouse will have a claim against the other for any assets.

This marital regime is particularly suited to spouses who intend to retain their respective careers and built up their separate wealth. It’s not recommended for spouses where one party intends to give up full-time work to become a homemaker as they would not be in a financial position to build up their own wealth during the marriage.

It is essential to have the services of a family law attorney who specialises in providing legal assistance to families.

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