652
CHAPTER 30: CAPITAL GAINS TAX
In the adjustment formula, the selling expenses are deducted from ‘R’ and not included in ‘A’. In the
basic TAB formula the selling expenses are deducted from ‘P’, unless the first formula applies, in which
case the selling expenses are deducted from ‘R’.
The effect is illustrated in the following examples:
Example 1
Mrs R bought a holiday house on 1 June 1991 for R200 000. She sells it on 30 March 2006 for an amount
of R550 000. She did not value the house on 1 October 2001. Mrs R incurred R10 000 in selling agent’s
fees and R12 000 in legal fees in March 2006 when she sold the house. Calculate her capital gain.
Proceeds
R550 000
Base cost:
B + [(P – B) x N]
T+N
Therefore, base cost is:
200 000 + [(528 000* – 200 000) x 11] =
5 + 11
Plus expenditure after 1 October 2001
(425 500)
(22 000)
Capital gain
( 447 500)
R102 500
* P = R550 000 – 22 000
Example 2
The taxpayer bought fixed property before 1 October 2001, made improvements before 2001, made further
improvements after 2001, and then sold it in the 2006 year of assessment (the principles are the same for
the 2007 year of assessment).
Purchase in September 1963
Improvements in 1977
Valuation at 01 October 2001
Improvements in 2004
Selling price in 2006 tax year (April 2005)
Selling agent’s commission
R 11 000
19 000
not done
23 000
852 000
40 000
Time apportionment works out at 20 years before, and 4 years after 01 October 2001.
Using the TAB formula and the 20% of proceeds formula as alternatives, the calculation of the valuation
date value (i.e. the value at 01 October 2001) is as follows:
First formula – the adjustment formula
P=Rx
B
(A + B)
(R852 000 – 40 000) x (11 000 + 19 000)
(23 000) + (11 000 + 19 000)
P = R459 623
Second formula – the basic TAB formula
Y = B + [(P – B) x N]
T+N
(R11 000 + 19 000) + [(459 623 – (11 000 + 19000) x 20]
4 + 20
The calculation of the capital gain is then as follows:
Y = R388 019
CHAPTER 30: CAPITAL GAINS TAX
Proceeds
Less base cost:
Valuation date value
Improvements in 2004
Agent’s commission
Capital Gain
653
R 852 000
(388 019)
(23 000)
(40 000)
(451 019)
R400 981
On the 20% of proceeds rule, the calculation is as follows:
Proceeds
Less:
Valuation date value – 20% of (R852 000 – 23 000 – 40 000)
Improvements in 2004
Agent’s commission
Capital Gain
R 852 000
(157 800)
(23 000)
(40 000)
R 631 200
This calculation can be used even if the taxpayer does have the necessary documentary evidence for
expenditure incurred before 01 October 2001. It is only that the TAB method is not allowed to be used if
the taxpayer cannot properly determine the expenditure incurred before 01 October 2001 on the asset.
Paragraphs 30(3) and Paragraph 30(4) – The extended formula
For the purposes of determining the time apportionment value, paragraph 30(3) provides that the time
apportionment calculation in paragraph 30(4) must be used where:
•
•
•
a person has incurred expenditure in terms of paragraph 20(1)(a), (c) or (e) on or after 1 October
2001; and
any part of such expenditure was allowed as a deduction in determining taxable income; and
the proceeds in respect of the disposal of the asset exceed all expenditure incurred in respect of the
asset.
In terms of subparagraph (4) the time apportionment base cost is determined by using the formulae:
Y = B + [(P1 – B1) x N]
T+N
and
B1
P1 = R1 x
(A1 +B1)
Where:
P1 =
A1 =
proceeds attributable to the expenditure in B1
expenditure incurred on or after 1 October 2001 allowable per paragraph 20, plus amounts
recovered or recouped per paragraph 35(3)(a)
B1 = expenditure incurred before 1 October 2001 allowable per paragraph 20, plus amounts recovered
or recouped per paragraph 35(3)(a)
B, N, T = the same as in the formula in paragraph 30(1)
R1 = total proceeds per paragraph 35 plus amounts recovered or recouped per paragraph 35(3)(a)
Example
In July 2001 a company purchased a machine at a cost of R500 000 for use in a process of manufacture. A
20% (s 12C) allowance was claimed for the years of assessment ending 31 December 2001, 2002, 2003,
2004 and 2005. In March 2005 the machine was improved at a cost of R50 000. In December 2005 the
machine was sold for R800 000.