The tax on a divorce settlement in South Africa depends on the nature of the transfer. The transfer of the matrimonial home under a divorce order is generally not subject to capital gains tax, since the exclusion in the Income Tax Act 58 of 1962 applies. The transfer of other assets under a divorce order is also generally exempt, but the transfer of an asset that is not part of the divorce settlement is subject to capital gains tax. The parties should seek tax advice before agreeing to the settlement, since the tax implications depend on the specific facts of the matter.
This page explains the tax on a divorce settlement in South Africa, the assets that are exempt, and the assets that are not. If you need help with a divorce settlement, our Sandton-based Family Law team can assist.
What the Income Tax Act says
The Income Tax Act 58 of 1962 contains specific provisions for the tax treatment of divorce settlements. The provisions are designed to ensure that the transfer of assets between spouses as part of a divorce settlement is not subject to capital gains tax, and that the receiving party is not taxed on the lump sum.
The provisions apply to assets that are transferred under a divorce order, including the matrimonial home, the pension interest, the business interests, and the other assets. The provisions also apply to a lump sum that one party pays to the other as part of the settlement.
The matrimonial home
The transfer of the matrimonial home under a divorce order is generally not subject to capital gains tax. The exclusion in the Income Tax Act applies where the home is transferred under a divorce order, and the receiving party is the spouse who is taking ownership of the home.
The exclusion has a cap of R2 million for the primary residence exclusion, but the cap does not apply where the home is transferred under a divorce order. The full value of the home is exempt from capital gains tax where the home is transferred under a divorce order.
The pension interest
The transfer of the pension interest under a divorce order is also generally exempt from capital gains tax. The transfer is treated as a section 37D transfer under the Pension Funds Act, and the spouse takes a credit in the receiving pension fund.
The lump sum withdrawal of the pension interest is generally subject to tax, and the tax is calculated under the retirement lump sum tax tables. The spouse should seek tax advice before agreeing to the lump sum, since the tax can be substantial.
Other assets
The transfer of other assets under a divorce order is also generally exempt from capital gains tax, including the business interests, the bank accounts, and the other investments. The exemption applies where the transfer is part of the divorce settlement, and the receiving party is the spouse.
The transfer of an asset that is not part of the divorce settlement, or that is transferred to a third party, is generally subject to capital gains tax. The most common situations are listed below in the order they usually arise.
- The transfer of an asset to a third party, including a relative or a friend, is generally subject to capital gains tax.
- The transfer of an asset that is not part of the divorce settlement, including a separate property, is generally subject to capital gains tax.
- The transfer of an asset that is part of the divorce settlement but is transferred more than 18 months after the divorce, is generally subject to capital gains tax.
Spousal maintenance
Spousal maintenance is generally not taxable in the hands of the recipient, and the paying party cannot deduct it from their taxable income. The maintenance is treated as a private transfer, and the Income Tax Act does not tax the transfer as income.
The paying party may, however, be able to deduct the spousal maintenance in some cases, depending on the specific facts of the matter. The parties should seek tax advice before agreeing to the maintenance, since the tax implications depend on the specific facts of the matter.
Common Mistakes to Avoid
These are the patterns that leave parties with the wrong tax outcome.
- Skipping the tax advice. The transfer of an asset can trigger capital gains tax, and the parties should seek tax advice.
- Failing to keep a record of the transfer. The record is useful for future tax purposes, and the parties should keep it for at least five years.
- Assuming the lump sum is taxable. The lump sum is generally not taxable in the hands of the recipient, and the paying party cannot deduct it.
- Skipping the timing of the transfer. The transfer must be made within 18 months of the divorce to qualify for the exemption.
- Letting the dispute escalate. The right path is to engage with the other party and apply for variation where appropriate.
Frequently Asked Questions
How much tax do you pay on a divorce settlement in South Africa?
The tax on a divorce settlement depends on the nature of the transfer. The transfer of the matrimonial home under a divorce order is generally not subject to capital gains tax, since the exclusion in the Income Tax Act applies. The transfer of other assets under a divorce order is also generally exempt, but the transfer of an asset that is not part of the divorce settlement is subject to capital gains tax.
Is the transfer of the matrimonial home taxable in a divorce?
The transfer of the matrimonial home under a divorce order is generally not subject to capital gains tax. The exclusion in the Income Tax Act applies where the home is transferred under a divorce order, and the receiving party is the spouse who is taking ownership of the home.
Is the transfer of the pension interest taxable in a divorce?
The transfer of the pension interest under a divorce order is also generally exempt from capital gains tax. The transfer is treated as a section 37D transfer under the Pension Funds Act, and the spouse takes a credit in the receiving pension fund.
Is spousal maintenance taxable in a divorce?
Spousal maintenance is generally not taxable in the hands of the recipient, and the paying party cannot deduct it from their taxable income. The maintenance is treated as a private transfer, and the Income Tax Act does not tax the transfer as income.
What is the timing of the transfer for the exemption?
The transfer must be made within 18 months of the divorce to qualify for the exemption. The transfer is part of the divorce settlement, and the parties should make the transfer as soon as practicable after the divorce.
Should the parties seek tax advice before agreeing to the settlement?
Yes. The tax implications of a divorce settlement can be complex, and the parties should seek tax advice before agreeing to the settlement. A tax advisor can help the parties understand the tax implications and structure the settlement in a tax-efficient way.
What is the tax rate on the capital gains in a divorce?
Capital gains tax is calculated at the marginal tax rate of the taxpayer, with a maximum effective rate of 18% for individuals. The exclusion in the Income Tax Act applies to the transfer of assets under a divorce order, so the capital gains tax is often R0 on the transfer of the matrimonial home.
Get help with your divorce settlement. If you need help with a divorce settlement, Otrebski Attorneys’ Family Law team in Sandton can assist. As a 100% women-led firm with a 5-star Google rating, we focus on compassionate, practical legal solutions for families.
Disclaimer. This article provides general information about the tax on a divorce settlement in South Africa. It is not legal advice and does not replace consultation with a qualified family attorney or a tax advisor. The relevant law is set out in the Income Tax Act 58 of 1962, which may be amended. Confirm the current position with the South African Revenue Service or speak to a tax advisor before relying on anything in this article.