CAPITAL GAINS TAX
Step 1
Determine whether CGT needs to be calculated
Step 2
Calculate and asses all capital gains and losses
Step 3
Less/plus: annual exclusion (Natural Persons)
Step 4 (Subtotal)
= Aggregate capital gain or loss
Step 5
Less: Assessed loss from previous year
Step 6 (Subtotal)
= Net capital gain/ assessed capital loss
Step 7
IF gain – multiply by inclusion rate
IF loss – carry forward to following year
Step 8 (Total)
= Taxable capital gain included in income
CGT IS APPLICABLE TO
-
Portion of gain/loss on
Capital assets
Disposed of on or after VD
Regardless of when the asset was acquired
-
Valuation Date (VD) = 1 October 2001
SCOPE
Residents
-
Worldwide Assets
Non-residents
-
Immovable property situated in SA (incl. interest in such property)
Assets ascribed to a PE in SA
SECTION 26A
-
Include a person’s taxable capital gain in taxable income for that year of assessment
8th schedule of Income tax act gives method to calculate taxable capital gain
STEP 1
Requirements
-
Asset
Capital nature
Disposal
Proceeds
Base Cost
STEP 2
CAPITAL GAIN/LOSS = PROCEEDS – BASE COST
ASSET
Includes all forms of property – Movable or immovable, tangible and intangible
Excludes currency
DISPOSAL
Any event, act, forbearance or operation of law which results in the creation, variation, transfer or extinction
of an asset
PROCEEDS
Proceeds = Selling price – recoupments
Proceeds = amount received by or accrued to a person upon the disposal of an asset less certain exclusions
Include:
-
Debt discharged
Amount received by/accrued to lessee from lessor for improvements effected
Exclude:
-
any amounts that have already been included in the TPs gross income or taxable income
any amounts repaid / become repayable
reduction of amounts
BASE COST
Onus rest on TP to determine BC -> in no BC determined, BC = R0
2 situations – asset acquired before VD or after VD
ACQUIRED AFTER VD
Base cost = cost price – allowances – scrapping value
Qualifying expenditure includes
-
Costs incurred in acquiring or creating an asset
Direct costs incurred in relation to the original acquisition
Direct costs incurred in relation to the disposal of the asset
Expenditure incurred to improve or enhance the value of the asset where improvements still reflect
in the nature of the asset at disposal (NB: not repairs)
Exclude
-
Any amounts allowed as a deduction in calculating TP taxable income
ACQUIRED BEFORE VD
Base cost = VDV + expenditure incurred after VD
VDV is greater of
-
MV on VD
TABC
0.2 (P-A)
Kink test to prevent manipulation of capital gains
HOW TO APPROACH THE KINK TEST COMPREHENSIVELY:
Step 1: we sold our asset. Therefore, calculate your recoupment so you can get your proceeds.
Step 2: we now want to get our Base cost so we can get (proceeds less base cost = CGT)
-
Therefore, step 2 = calculate all 3 of your base costs
o MV
o TABC
o 20%(SP-Cost after validation date)
Step 3: now we start to use kink:
-
1) determine if you are in a historical gain or loss situation
o Take your proceeds (#selling price) and see if it is greater or equal to costs before + costs after
o
o
If we see our proceeds is greater or equal to B + A, this means we are on the left side of the
flow chart ( a historical gain)
▪ Eg: proceeds = 500 000
▪ Cost to purchase 200 000
▪ Improvements = 50 000
● So 500 000 >= 250 000
● Therefore – historical gain
Obviously if our costs are greater or equal to our proceeds we are then on the right side ( a
historical loss0
Historical Gain:
Now that we have determined which side we are on, we as the tax payer can elect/choose the highest base
cost.
-
If 20% or TABC is the highest, then there will be no kink and our BC is legit either the (20% or TAB) +
any costs after validation date
However, if MV is chosen then we look at kink 1
o If MV is the highest BC of the 3, we must see if our P<= MV [
▪ If yes, meaning, our proceeds is lower or equal to our cost, it would result in a
capital loss. So to prevent this, we have to change our VDV to:
● Proceeds less costs after validation date.
● The end result will mean that we are now in a capital gain.
o If however, MV is lower than our proceeds we then can just leave it and still use MV as our
BC. {but don’t forget to always add back any costs after VD}
Historical Loss:
So here is when our proceeds is in fact less than both costs before + costs after
So before, in a historical gain situation, we were able to choose our BC. But now in a Historical loss, we are
forced to use MV.
The question is, what if MV isn’t given? Meaning, the tax payer did not get his asset valued on 1 October 2001.
( SARS gives a TP until 30 September 2004 to do so, otherwise there is no MV available.
Assets>10 000 000
Intangibles > 1 000 000
Shares in a listed company>10 000 000
SARS says you have to get it valued before 30 September 2004)
o
o
So here it goes. If MV is NOT given, we must do the following:
o Simply use TABC
If MV is Given:
o We must check 2 things ( both requirements must be met)
1) Our costs before VD >= P
2) Our costs before VD >= MV
If both ARE met: we chose higher of
o
MV
o
P-A
If 1 is not met or both are not met: chose LOWER OF
o MV
o TABC
DONATIONS PARA 22
Donor may add a portion of donations tax to the base cost (higher BC = lower CGT)
Y = (M – A)/M * D
Y = amount added to Base Cost
M = MV of donation
A = base cost before adding the donation tax [therefore, A = cost the asset was purchased for + any
improvements)
D= Donations tax (will be given to us)
Therefore:
proceeds = MV
BC = cost + improvements + donations tax
-
If donations tax is paid by donee, his base cost is increased and not the donors
o Base cost = Capital gain of donor/market value of asset * donations tax
STEP 3
Less/plus: annual exclusion limited to 0 (natties)
Exclusion = R40 000
Exclusion in year of death = R300 000
-
Decrease Capital gain
Decrease capital loss
Cannot be utilised to decrease an assessed capital loss
STEP 4
Subtotal – aggregate gain or loss
STEP 5
Less assessed capital loss from previous year
STEP 6
Subtotal – Net capital gain/assessed capital loss
STEP 7
IF gain – multiply by inclusion rate (80% / 40%)
IF loss – carry forward to following year
STEP 8
Add gain to taxable income – Added before S18A donation deduction
EXCLUSIONS FROM CGT
-
Primary residence exclusions
Personal use assets
Retirement benefits
Long term assurance
Disposal of small business assets
Compensation for personal injury, illness or defamation
Gambling, games or competition
Donations and bequests to PBO’s and exempt persons
PRIMARY RESIDENCE EXCLUSION
-
Natural person or special trust must disregard any capital gain/loss not exceeding R2mil on disposal of
primary residence
Natural person can only have one primary residence at a time
Residence
-
Structure (incl. boat, caravan or mobile home) used as place of residence
Incl. any appurtenance e.g. pool, garage, tennis court
Primary residence
-
A residence in which a natural person holds an interest and in which that natural person/spouse
o Ordinarily resides/resided in as main residence; and
o Used mainly for domestic purposes (not work)
Para 45 (1)(a) or 1(b) RULES:
Para 45(1)(a): 🡪 capital gain or loss reduced by R2million, limited to Zero
Para 45(1)(b) 🡪 Disregard capital gain if proceeds do not exceed R2million
▪
-
-
If capital loss must do full calc
Sub para 45 (1)(b) Will not apply when:
▪ The owner was not ordinarily resident in that residence for the full
period he owned the house for. #must apportion
▪ He used the residence for the purpose of carrying on trade #must
apportion
● Therefore, whenever we apportion, the proceeds rule is out
the window
#apportions:
o We apportion the Gain or the Loss, NOT the R2million
▪ We start the apportionment from 1 October 2001.
▪ So, we disregard what the owner did before that. We look to see if he
was ordinarily resident in the residence and/or if he used the house
for trade purposes from that date onwards
o If it was a pre-valuation date asset, we will first Calculate BC on 1 October
2001 by taking into account all costs before, ect .. to get our capital gain or
loss, we then apportion it and then deduct our R2million exclusion
o NB: The non-qualifying portion of the primary residence does not get the R2
million exclusion, but it will still go into our CGT column
Para 45(2)
-
Exclusion is apportioned if held by more than one person or special trustapportioned in relation to interest
o Must also reside in residence
Para 46
1. Rules restricting exclusion - Size and use of land:
 The R2 million exclusion only applies to so much of the land on which the primary
residence is situated as:
● Does not exceed 2 hectares;
● Is used mainly for domestic/private purposes; and
● Is disposed of at same time and to same person as the residence.
 The house itself always qualifies in full.
Para 47:
-
Not being ordinarily resident in the residence for the full period
Para 47 is subject to Para 48.
Para 47 – exclusion only applies to the portion of capital gain/loss which relates to the
period of time which was ordinarily resident
Para 48:
There will be no need to apportion the amount of time not lived in the house if it meets 1 of
the following requirements (no more than 2 years.)
1) The house was offered for sale/intended for acquisition by a new owner
2) Residence was being erected on the land acquired for the purpose of erection to be
used as part of the primary residence
3) The residence was accidentally rendered uninhabitable
4) The death of that person.
If any of the above occurred, then para 47 apportionment will not be necessary. We will
consider the resident to have lived there for the whole period.
Para 49:
Para 49 is subject to para 50
Para 49:
-
If person was Carrying on trade while living BUT >=51% must be for Domestic
purposes 🡪 we can apportion for the qualifying for para 45 (annual exclusion). If less
than 51%, we lose para 45 annual exclusion
Para 50:
If I get rentals from someone using my primary resident (#this is for trade purposes) but para
50 deems it to be still be known as domestic if the TP Must meet all the requirements.
Therefore, no apportionment is necessary if:
1) The original resident must have resided in the house for at least 1 year prior and
1 year after the tenant
2) No other person was treated as a primary resident during that period of time.
3) You were:
a. Temporarily absent from the republic
b. You were carrying on business in the republic at least 250 km from that
residence
4) All the above does not exceed 5 years
E.g – my employer sends me to Durban (#further than 250km) to work for a year. So I
decided to let my house where I lived in it before and after.
I do not need to apportion my time lived in my house
STEPS TO BE FOLLOWED WHEN CALCULATING THE GAIN OR LOSS ON DISPOSAL OF A PRIMARY RESIDENCE:
● Calculate the gain or loss (proceeds less base cost).
● If a gain arises, apportion the gain between the gain that qualifies for the R2 million
exclusion and the part that doesn’t.
● The part that doesn’t qualify will be aggregated with other gains or losses subject to
the R40 000 exclusion.
● The remaining part will be decreased by the R2 million.
Example 3:
Yolandi acquired a residence on 1/10/2001 for R350 000 and resided therein for 10 years. During this time
she operated a media relations consulting business from the premises (35% of the floor space was used for
the business). She then decided to expand her business and purchased another residence in which to live.
She converted the remainder of the original residence into business premises. 15 years after converting
the property she sold it for R3.65 million. Over the years she had effected improvements to the property
amounting to R250 000
P = 3 650 000
1067500
BC = (350 000+250 000) = (600000)
1189500
CGT = 3 050 000
Nil
Business usage:
3 050 000*35% = 1 067 500 (non-qualifying)
Remaining qualifying = 3 050 000 – 1 067 500 = 1982500
Non-resident:
1 982 500 * 15/25 =( 1189500) (non-qualifying)
Therefore: 19825 00 – 1189500 = 793000 [Qualifying for p45]
793 000 – 2 000 000 (limited to qualifying value) = Nil
Capital gain
2 257 000
Para 5
(40 000)
2 212 000
S26A= 2 212 000 * 40%
AWARDS FOR DAMAGES IN RESPECT OF LOSS OF VIEW
-
A deemed disposal of part of the residence
Proceeds = amount received from dispute claim
Base cost = Apply para 33 part disposals + legal fees etc.
-
Primary residence exclusion apportioned between the part disposals
886800
PERSONAL USE ASSETS (PARA 53 8TH SCHEDULE)
Natural person must disregard any capital gain/loss on the disposal of a personal use asset
Personal use asset – asset owned by NP used mainly for purposes other than carrying on a trade
Specific exclusions (these will be taxed)
-
Gain made from gold/platinum
Immovable property (para 45 🡪 not personal use assets)
Financial instrument
Short term insurance policies over non-personal use assets
Long term insurance contracts
-
Aircraft with empty mass > 450kg
Boat exceeding 10m in length
Any fiduciary or usufructuary interest which value decreases over time
Time share with a fixed life, value decreases over time
-
Lease of immovable property
Loss limitation Para (15) – 8th – person must disregard any loss on disposal but still take gain into account
If a natural person receives an allowance as compensation for using his asset for business purposes, the asset is
deemed to be used mainly for purposes other than carrying on a trade, and thus it could still qualify for the
exclusion.
RETIREMENT BENEFITS
Capital gain or loss from
-
2nd Schedule lump sum benefit from a pension, provident or retirement annuity fund; or
Lump-sum benefit from a fund outside SA similar to above
Is disregarded
LONG TERM ASSURANCE
Disregard a capital gain/loss due to a receipt or accrual of an amount from the policies listed
below:
-
Only applies to new policies
No exclusion is granted to foreign long-term insurance as was never subject to tax in SA
Disregarding of capital gains and losses by original beneficial owner [para 55(1)(a)(i)]
Paragraph 55(1)(a)(i) provides that any capital gain or loss on disposal of a long-term policy must be
disregarded by its original beneficial owner or one of its original beneficial owners. The type of policy
envisaged is one that gives rise to the receipt or accrual of an amount in the hands of the original
beneficial owner or owners upon its disposal. The exclusion applies to a long-term policy as defined in
the Long-term Insurance Act 52 of 1998, issued by a South African insurer.
13.4.2 Exclusion of certain second-hand policy proceeds
A person must disregard any capital gain or loss determined in respect of a disposal that resulted in
the receipt by or accrual to that person of an amount derived in the circumstances set out in para
55(1)(a) to (d).
13.4.2.1 The spouse, nominee, dependant or deceased estate exclusion [para 55(1)(a)(ii)]
An amount derived by the
• spouse,
• nominee,
• dependant as contemplated in the Pension Funds Act 24 of 1956, or
• deceased estate
of the original beneficial owner of a long-term policy with a South African insurer will not give rise to a
capital gain or loss, provided that no amount has been or will be directly or indirectly paid in respect of
any cession of the policy.
13.4.2.2 The former spouse exclusion [para 55(1)(a)(iii)]
The former spouse of the original beneficial owner of a long-term policy with a South African insurer
must disregard any capital gain or loss arising from the disposal of that policy when
●
●
as a result of that disposal an amount has been received by or accrued to that former spouse;
and
that policy was ceded to that spouse in consequence of a divorce order; or
that policy was ceded to that spouse in consequence of an agreement of division of assets which has
been made an order of court in the case of a union contemplated in para (b) (religious marriage) or (c)
(permanent same-sex or heterosexual union) of the definition of “spouse” in s 1(1).
13.4.2.3 The employee / director exclusion [para 55(1)(b)]
A person must disregard any capital gain or loss determined in respect of a disposal that resulted in
the receipt by or accrual to that person of an amount in respect of any policy, when that person
●
●
is or was an employee or director whose life was insured under that policy, and
any premiums paid by that person’s employer were deducted under s 11(w).
13.4.2.4 The partners and shareholders exclusion [para 55(1)(c)]
This provision concerns so-called buy-and-sell arrangements which occur when partners or
shareholders take out insurance against the death, disability or illness of their fellow partners and
shareholders.
-
The purpose is to provide them with funds to buy out their fellow partner or shareholder’s
interest in the partnership or company should the fellow partner or shareholder die, become
disabled or severely ill. When the business comes to an end, there is no purpose for the
policies and they are often ceded to the person whose life was insured under the policy. This
provision allows the life assured to acquire the policy from the original beneficial owner, and
ensures that the policy is treated in the same way as if that life assured had been the original
beneficial owner. For the exclusion to apply the person acquiring the policy must not have
paid any of the premiums in respect of the policy while the other person was the beneficial
owner.
13.4.2.5 The pension, provident or retirement annuity fund policy exclusion [para 55(1)(d)]
A capital gain or loss must be disregarded when
●
●
●
a policy was originally taken out on the life of a person,
that policy is provided to that person or dependant by or in consequence of that person’s
membership of a pension fund, pension preservation fund, provident fund, provident
preservation fund or retirement annuity fund, and
an amount is received or accrued in respect of the disposal of that policy.
13.4.2.6 Risk policy with no value [para 55(1)(e)]
A person must disregard any capital gain or capital loss determined in respect of a disposal that
resulted in the receipt by or accrual to that person of an amount in respect of a risk policy with no cash
value or surrender value.
13.4.2.7 Policies in respect of which the premiums were taxed as a fringe benefit or not
deductible [para 55(1)(f)]
The purpose of para 55(1)(f) is thus to mirror for CGT purposes the relief granted to an employee,
director or employer under s 10(1)(gG) or (gH).
DISPOSAL OF SMALL BUSINESS ASSETS
First R1 800 000 of capital gains from the disposal active business assets by a small business is disregarded
-
Only available to natural persons
Only available if all the qualifying capital gains in respect of multiple disposals are realised over a
maximum period of 24 months
Must have held asset for a continuous period of 5 years
Substantially involved in the operations
Attained age 55yrs or disposal in consequence of ill health, superannuation or death
Lifetime allowance
Active business asset
-
Immovable property to the extent used for business purposes
Other assets used wholly for business purposes
Excludes
o Financial Instruments
o Asset held to derive passive income (rent, annuity, foreign exchange gains)
Small business
-
MV of all its assets does not exceed R10mil
o Consider interest in partnership & direct equity holding (10%)
Multiple businesses / interests
-
Include disposals of all businesses
In determining R10mil MV consider assets of all businesses
COMPENSATION PAYMENTS
NP must disregard any capital gain/loss upon receipt of compensation for personal injury, illness or
defamation
Reason: merely restoring loss
GAMBLING, GAMES OR COMPETITION
All capital losses must be disregarded
Capital gains only disregarded if:
-
NP and gambling/game/competition was authorised and conducted ito SA laws
Therefore
-
Foreign winnings are subject to CGT
All winnings (local and foreign) of a company are subject to CGT
DONATIONS TO PBOS AND EXEMPT PERSONS
A taxpayer should disregard a capital gain or capital loss suffered when an asset is disposed if all
amounts received by or accrued by the entity would be exempt from tax in terms of section 10 (i.e.
exempt entities).
ROLL – OVER RELEIF
IDENTICAL ASSETS
-
FIFO
Specifically Identified
Weighted Average
o Listed shares
o Unit Trusts (CIS)
o Gold/platinum coins
o Listed S24J instruments
▪ All weighted average assets have an available market price
▪ Any additional assets purchased must be included in the weighted pool.
▪ For these four assets 🡪 Can only select another method once all assets are sold
PRE-VD IDENTICAL ASSETS
Find valuation date value
-
If using FIFO or specifically identified
o MV
o .2(p-A)
o
-
TABC
If using weighted average
o MV divided by number units (volume weighted average (VWA))
▪ VWA will be provided in tests
PART DISPOSALS
BC of asset part disposed = total BC * MV part sold / total MV
BC on final disposal = Total BC + improvement values – BC of part disposals
If expenditure can be directly allocated to a part of the asset, keep that allocation when calculating BC
Does not trigger part disposal
-
Granting an option
Granting, variation or cession of right of use of an asset with no proceeds received
o Note: proceeds and not consideration
o Proceeds will be reduced to nil by amount included in GI
-
▪ If proceeds not nil then do normal allocation
Improvements by lessee to immovable property
o Do full CGT at end of lease
Replacement of part of an asset – repairs
If .2(P-A) is selected for valuation of part disposal 🡪 must adopt same valuation method for any other parts
disposed of
MARRIED PERSONS
S9HB
ITA, therefore, applies to revenue and capital assets
Capital Asset
-
-
Person disposes of an asset to his/her spouse, any capital gain or loss is disregarded.
The transferee spouse takes over all aspects relating to the asset.
The transferee is therefore treated as having acquired the asset at the same time, for the
same cost, in the same currency and for use in the same manner as the transferor during
the ownership by the transferor.
The asset is transferred between spouses at base cost.
o No capital gain or loss is taken into account at the time of the transfer (disposal).
When the new owner (spouse) sells the asset, the base cost will be the original base
cost for the spouse that transferred the property plus any subsequent qualifying costs
(paragraph 20).
o
o
If dies, disposed of asset immediately before date of death
Transfer in divorce treated as a disposal
Trading stock
PARA
Seller - Treated as having disposed of asset for amount allowed as a deduction
Acquirer – Treated as being one and the same person, date of acquisition, amount of acquisition
14
Asset within joint estate
-
Treated as having been made in equal shares by each spouse
Assets not within joint estate
-
Treated as being made solely by spouse making the disposal
LOSS LIMITATION
INTANGIBLE ASSETS – PARA 16
A person must disregard any capital loss on disposal of an intangible asset acquired before the valuation date if
it was
●
●
acquired from a connected person, or
associated with a business taken over by that person or any connected person in relation to that
person.
This restriction does not affect self-developed intellectual property or intellectual property acquired on or after
valuation date.
DEPOSITS – PARA 17
Capital losses arising from the forfeiture of a deposit made to acquire an asset not intended to be used wholly
and exclusively for business purposes should be disregarded.
However, paragraph 17 of the Eighth Schedule lists assets of which capital losses on the forfeiture of deposits
will not be disregarded, even if the asset is not used for business purposes, namely:
●
●
●
●
a coin made mainly from gold or platinum, of which the market value is mainly attributable to the
material from which it is minted or cast;
immovable property, other than immovable property intended to be the primary residence of that
person;
a financial instrument; or
any right or interest in any of the abovementioned assets.
DISPOSALS AT MARKET VALUE - PARA 38
Donation of an asset
Disposal of an asset not measurable in money
Disposal to a connected person for a consideration that does not reflect an arm’s length price
-
deemed that the disposal took place for an amount equal to the market value of the asset on the date
of the disposal.
Person acquiring the asset is deemed to have acquired it at a base cost equal to the same market
value.
o Therefore, the market value will be treated as expenditure actually incurred in terms of
paragraph 20 of the Eighth Schedule.
This provision does not apply to the disposal of the following assets:
-
a right contemplated in section 8A;
an asset in the circumstances contemplated in section 10(1)(nE) (exemption for amounts derived
under a share-incentive scheme);
a qualifying equity share contemplated in section 8B by an employer, associated institution or any
other person by arrangement with the employer to an employee; or
any asset in respect of which section 40CA applies (assets acquired by a company in exchange for
shares issued by it).
The provisions of section 9HB override those of par 38(1).
CAPITAL LOSSES ON DISPOSALS TO CONNECTED PERSONS PARA 39 – “CLOGGED LOSS RULE”
When an asset is disposed of:
●
●
●
to a person who was a connected person immediately before the disposal; or
to a person who immediately after the disposal is a member of the same “group of companies”
or
a trust with a beneficiary that is a member of the same group of companies
the capital loss will be disregarded in the determination of the aggregate capital gain or loss,
-
but can be deducted from capital gains from future disposals to that same person, provided that it is
still a connected person (i.e. the capital loss is ring-fenced).
-
Para 39 connected person excludes relatives other than parent, child, stepchild, brother, sister,
grandchild, grandparent
‘four funds’ of long-term insurance are not treated as connected persons for para 39
Where company redeems their shares, holder treated as having disposed of them to that company
-
-
Eg: Mr A and Co B are connected persons as Mr A owns 20% shares in Co B (purchased at a cost of
100 000) and no other shareholders own 50% or more shares. Therefore, they are connected.
Now Mr A sells his shares in Co B and purchases shares in Co C (he purchased 20% … same
situation) but he only was able to buy shares at a MV of 80 000
-
Take note that Mr A is connected to Co B but:
o Cost of 100 000
o Selling price = 80 000
o Therefore 80 000 less 100 000 = 20 000 loss
▪ Therefore, the loss of 20 000 cannot be claimed by MR A, its infact ring fenced
until a capital gain between Mr A and Co C occurs. ( so Mr A will be able to reduce
the capital gain next time to reduce CGT)
REDUCTION OF DEBT – AS IN ALLOWANCES NOTES
S19
-> income tax implications -> debt used to fund tax deductible expenditure
Par12A of 8th schedule
-> CGT implications -> debt used to fund acquisition of capital/allowance assets ->
only position of debtor
Waiver, cancellation, reduction or discharge of debt
Amendments to section 19:
●
Only events that result in an actual “realisation” of the debt will trigger tax. Thus, for example, a
simple subordination of a debt will no longer trigger tax (unless, of course, the subordination results in
actual realisation of the debt).
●
In the case of loan capitalisations, the application of the rules will generally be limited to
circumstances in which the interest-bearing debt is converted into equity for less than face value and
where the relevant debt was interest-bearing.
The above amendments apply retrospectively with effect from the date that the 2017 amendments took effect
(i.e. tax years commencing on or after 1 January 2018).
Amendments to para 12A of the Eighth Schedule:
●
The existing donations tax exclusion from the debt relief rules will only apply to a debt relief
arrangement to the extent that donations tax is payable in respect of a donation arising from that
arrangement.
●
The debt relief rules was previously not triggered where the relevant debt was used to fund a capital
or allowance asset that is no longer held by the debtor when the debt is waived. The debt relief rules
are now triggered where this is the case.
THOUGHT PROCESS
-
Inability to pay?
Exclusions?
Amount of debt concession/compromise?
Funded asset or expenses?
o Asset on hand or sold?
DEBTOR IMPLICATIONS
CREDITOR IMPLICATIONS
Loan
-
Revenue
Capital
o Consider what debt was utilised for
Non-connected person
-
No issue -> claim loss
Connected persons
-
Para 39
Para 56
o Para 56 takes preference over para 39
PARA 56:
-
-
Losses on disposal of claims owed by connected persons (i.e. the position of a creditor) are addressed
in paragraph 56.
Paragraph 56(1) determines that capital losses resulting from the write off of debt between connected
persons must be disregarded.
o However, if the debtor is subject to a base cost / assessed capital loss or gross income
inclusion on the write-off, the creditor will be able to claim the capital loss.
Despite the normal rules in paragraph 39 that “cloggs” or ring-fences losses with connected persons,
paragraph 56(2) contains provisions that would not disregard capital losses between connected
parties during debt write-off.
DEBT SUBSTITUTION – PARA 34
Under the Eighth Schedule the disposal by a person of an asset to a creditor in order to reduce or
discharge a debt owed to that creditor would result in a disposal by the debtor as well as a disposal by
the creditor.
The debtor would dispose of the asset for a consideration equal to the amount by which the debt
owed to the creditor is reduced as a result of that disposal [para 35(1)(a)]. The debtor would therefore
determine a capital gain or a capital loss in respect of that disposal depending on whether or not that
consideration would constitute proceeds and whether those proceeds will exceed the base cost of that
asset.
The creditor, in turn, would dispose wholly or partially of the claim against the debtor for proceeds
equal to the market value of the asset obtained in return. The creditor would, therefore, show a gain or
a loss when the market value of the asset obtained from the debtor exceeds or is less than the
amount by which the creditor's claim would be reduced. The creditor may have to account for this gain
or loss as a capital gain or loss if that gain or loss is not taken into account for purposes of
determining the creditor's taxable income before the inclusion of any taxable capital gain, for example,
if a loss is not taken into account as a bad debt under s 11(i).
The base cost, for the creditor, of the asset acquired from the debtor would in the absence of the debt
substitution rule be equal to the consideration given by the creditor, namely, the amount of the claim
given up by the creditor. Under this paragraph, however, the asset must be treated as one acquired by
the creditor at a base cost equal to its market value at the time. The market value of the asset is
treated as an amount of expenditure actually incurred and paid for the purposes of para 20(1)(a). This
treatment prevents any double counting in the creditor's hands of an amount equal to the gain or loss
determined in respect of the exchange of the creditor's claim for the asset.
OPTIONS
Para 18 – options abandoned/ expired
Capital losses should be disregarded when an option is abandoned or expired if it was acquired to acquire or
dispose of an asset not intended to be used wholly and exclusively for business purposes. However, this rule
does not apply to an option to acquire or dispose of the following assets:
-
a coin made mainly from gold or platinum, of which the market value is mainly attributable to the
material from which it is minted or cast;
immovable property, other than immovable property which is intended to be a primary residence;
a financial instrument; or
any right or interest in the abovementioned assets.
Para 58 – Options exercised
When a person acquires or disposes of an asset by exercising an option, the option is terminated and a capital
loss will probably be realised. Any capital gain or loss on the exercise of the option should be disregarded. This
is read together with paragraph 20(1)(c)(ix) which includes the cost of purchasing that option as paragraph 20
expenditure and is included in the base cost of the asset so purchased/disposed of.
FOREIGN CURRENCY TRANSACTIONS
8TH SCHEDULE PARA 43
-
Para 43(1): individuals and/or Non-trading trusts – not carrying on trade
● calculate the Capital Gain/Loss in the foreign currency
● and then translate to Rands
i. This way, there is no tax on the foreign exchange gains/losses
ii. Average or SPOT
-
Para 43(1A): Companies or Trading trusts - carrying on trade
● Translate the foreign proceeds (selling price less recoupment) into Rands in year of Disposal
and the Base cost (cost less allowances) into Rands in year of Acquisition.
i. There is tax on foreign exchange gain/loss
ii. At spot rate on those dates
USUFRUCT + BARE DOMINIUM
Value calculation = same as for donations tax purposes
Base Cost = allowable expenditure apportioned between usufruct and bare dominium
Any capital loss is disregarded – para 15(c) (personal use) 🡪 value must decrease over time
QUESTIONS ON CGT – SA TAX
1) All assets except Fixed property and assets of permanent establishment will be disposed of when a
person ceases to be a resident in SA
2) If tax payer does not know the original costs before VD and he also does not know the value on VD,
then the BC will automatically be 20% of disposals and NOT Nil
3) Donations to a spouse have no CGT because the donner gives his asset away at BC and not MV
(therefore, BC – BC = 0) and the donee will acquire the asset at Base cost.
4) Someone who dies automatically is seen to have disposed of his assets at MV, except for:
a. Interest in a pension fund
b. Assets transferred to an existing spouse
c. Certain long term insurance funds
5) When need to provide commissioner with valuation of asset before disposed of:
6) If pre-VD asset and donated, P=MV in all calcs to find BC
7) No CGT on donation to PBO para 62