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Tax implications for marriages in community of property

The default marriage regime has some complicated tax consequences.

When couples are caught up in wedding and honeymoon planning, visiting their attorney often takes a backseat. Many couples don’t realise that different marital laws affect how their assets are managed during marriage, divided if it ends, and how they’re taxed.

The different legal frameworks determine if a marriage has a community of property between the partners. This idea dates back to when a married couple’s belongings were combined into one estate, usually managed by the husband.

The concept of marital power was removed in 1984 through the declaration of the Matrimonial Property Act, and various other pieces of legislation have since been enacted to recognise same-sex unions and marriages according to traditional and/or religious rights.

However, while a couple has the option of entering into a legal agreement aimed at keeping their respective estates separate, known as an antenuptial contract or ANC, in most cases—in the absence of such a contract—the default marriage regime is that of community of property.

The focus of this article is therefore on the tax aspects that affect marriages in community of property.

When a couple is contemplating marriage, often the last thing that they want to consider is that their marriage might end.  However, the harsh reality is that all marriages do come to an end at some point—whether by divorce, annulment, or the death of one of the partners.

COP marriages and your tax return

SARS made some updates to the 2023 personal income tax return. While most reporting requirements stay the same, the way SARS verifies the information is what’s drawing the most attention.

When filling out your tax return’s personal details, there’s a drop-down box to choose your marital status: unmarried (including single, divorced, or widowed), married outside of community of property, or married in community of property.

If you are married in community of property, a separate section for spouse details is opened, in which SARS requires your spouse’s initials and their ID number.  However, providing these details is more than a simple box-ticking exercise. These include investment income (interest and dividends, both local and foreign), rental income, and capital gains and losses.

If you’re married in community of property, you’re taxed on half of your own and half of your spouse’s interest, dividends, rental income, and capital gains.

How SARS deals with COP marriages

Over the past few years, SARS has moved towards greater reliance on third-party data to pre-populate personal tax returns.  As of the 2022/23 tax year, returns are now pre-populated with employment income (IRP5 / IT3(a) certificates), investment income, medical scheme information, and retirement annuity fund contributions.

If you have previously submitted a return in which you have indicated that you are married in community of property, and SARS has confirmed a match with the information held by the Department of Home Affairs, any investment income data that has been uploaded to SARS will automatically appear on both yours and your spouse’s tax returns.

For any investment income that has not pulled through from a third-party upload, as well as for any rental income and capital gains or losses, you will need to capture the full amount of income received by both spouses in both of your tax returns.  SARS will automatically divide this income on a 50/50 basis.

This will be reflected on the notices of assessment (ITA34) issued to both you and your spouse once the returns have been submitted. Your returns do not need to be submitted simultaneously to achieve this split.

Exclusions from the communal estate

Some income types, by law, aren’t included in the community of property. For instance, if someone inherits property or investments, and the deceased’s will specifically states it’s outside the communal estate, then it’s excluded.

The tax return has a provision for indicating these exclusions. In the investment income section, there’s a box beside each item where you can mark an ‘X’ if that amount should be kept out of the communal estate (for those married in community of property).

Marking this box ensures the exclusion and the full tax applies only to the spouse named on the investment. To prevent confusion and mistakes, it’s suggested that the spouse not receiving the income also marks this box on their return.

Other income streams that are automatically excluded from the communal estate are:

Salary income: Salaries have been taxed separately since the tax tables were harmonised in the early 1990s. This applies irrespective of one’s marital status.

Business income: Income from a business, other than rental income, is taxed in the hands of the recipient. In the case of a partnership, each partner must declare the total income earned from the business, tick the box marked ‘Are you in a partnership?’, and enter the percentage interest held.

Other considerations

If you and your spouse are separated and such separation is likely to be permanent, you would need to submit an RRA01 form to SARS or lodge an objection against your return.

If you and your spouse are divorced and you had omitted to amend your marital status from married in community of property to not married. You can submit a request for correction via e-filing.  SARS will issue an amended assessment but is likely to request an upload of your divorce decree—particularly if the divorce was recent and the Home Affairs records have not yet been updated.

WRITTEN BY STEVEN JONES

Steven Jones is a registered SARS tax practitioner, a practising member of the South African Institute of Professional Accountants, and the editor of Personal Finance and Tax Breaks.

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.

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