General on Capital Gains Tax:
- GI definition specifically excludes any receipts/accruals
of a capital nature.
- Disposal of cap. asset = proceeds from sale are not
included in GI as they are capital.
- Purchase of cap. asset = no s11(a) deduction.
- From 1/10/2001 = Sale of any asset = CGT.
- Prior 1/10/2001 = any disposal of asset would not have
tax consequences.
- VALUATION DATE = 1 OCTOBER 2001.
- CGT = not a separate tax, forms part of Income Tax. Net
capital gains are specifically included in TI i.t.o. s26(A).
- CGT FRAMEWORK:
Total Capital Gains xxx
LESS: Total Capital Losses (xxx)
Subtotal xxx
LESS: Annual Exclusion (individuals) (xxx)
= AGGREGATE CAP GAIN/LOSSES xxx
LESS: Assessed losses bought forward (xxx)
= NET CAP GAIN/ASSESSED LOSS xxxx
Assessed loss = no inclusion, carried over to next YoA.
Net cap gain = Included in TI @ 80% (for Co.’s)
40% (for Individuals/Trusts)
- Building blocks for CGT:
1. An asset (Part 1 in Act)
2. Disposed of (consider deemed disposals) (Para 11)
3. During YoA on/after 1/10/2001
If all 3 are present one must calculate:
- Proceeds (Para 35)
- Base Cost (Para 20)
Deemed disposals:
- Para 12 deals with events treated as disposals.
- There was no actual acquisition or disposal by TP but
for CGT there is deemed to be an acquisition/disposal.
- Event treated as an acquisition = sets out a base cost
that TP can deduct from proceeds.
- Para 12(1) states that TP disposed of asset fpr
proceeds = M/V
- Person who acquired that same asset acquired it at
M/V therefore their base cost = M/V
Proceeds (Para 35):
- Proceeds = 1. The amt received by/accrued to TP i.r.o.
disposal.
2. Any amt that is treated as having been received
by/accrued to TP i.r.o disposal.
- Specifically included: 35(1)
1. Amt by which any debt owed by person has been
reduced/discharged by creditor.
2. Any amt received by/accrued to a lessee from lessor
i.t.o improvements.
- Proceeds must be reduced by: 35(3)
1. Amts already included in GI/TI (recoupments)
2. Any amt that has to be repaid to the buyer by the
seller.
3. Any amt by which proceeds have been reduced i.t.o.
the sale agreement
Donations and sales @ less than M/V (Para 38):
- When a person donates an asset to another person =
deemed disposal. 38(1)
- Therefore donor disposed of asset at M/V. Donee
deemed to acquire it @ M/V. 38(1)
- Applicable to the following:
1. An asset disposed of for a consid. Not measurable in
money.
2. An asset disposed to a connected person for consid.
Which is not @ arm’s length. (not at M/V or less than
M/V)
- Not applicable to: 38(2)
- A share option issued.
- Cancellation/repurchase of a share originally issued
under a scheme which is exempt.
Capital Gains Tax
Base Cost (Para 20)
- On/after 1/10/2001.
- Base cost of post valuation date assets consists of:
1.Amts incurred to acquire the asset (Purchase Price) &
2. Any qualifying expenditure i.t.o para 20 after
acquisition date.
- Accurate records have to be maintained of all amounts
for them to be included into the base cost of such asset
@ time of disposal.
- If TP can’t prove expenditure; Base Cost = 0 therefore
the TP will have a cap gain = Proceeds.
- Qualifying expenditure (QE) listed in para 20:
- Acquisition/creation of asset
- Valuation cost
- Buying & selling costs (i-ix)
- Legal title
- Improvements (Cost must form part of base cost; if
improvement does not exist when asset is disposed
cost will not form part of that asset’s base cost.)
- Value of option
-Interest and listed shares (1/3 of interest on money
used to finance asset will form part of the base cost of
asset)
- Amts excluded from base cost: 20(2)
- Borrowing costs
- Raising fees
- Repairs and maintence (s11(d) deduction)
- Protection and insurance
- Rates and taxes
- Amts reducing the base cost: 20(3)
- Expenses allowed as a deduction ≠ base cost
- Recoupments and deduction don’t form part of the
base cost of the asset.
- S11(o) can’t be utilised i.t.o. a connected person but if
claimed, TP must deduct it along with all the other
allowances from the base cost of that asset.
 Base Cost (Para 20)
- Before 1 Oct 2001
- Base Cost = VDV + QE
- Pre-valuation asset disposed, part of that capital gain not
subject to CGT.
- 2 paragraphs that deal with the Valuation Date Value
(VDV) of a pre-valuation date asset:
1. Para 26= Proceeds > Expenditure (B + A) (Historic Cap
Gain)
2. Para 27 = Proceeds <= (B + A) (Historic Cap loss) (CTA)
- If para 26 (starting point) applies, 3 methods available to
determine VDV; TP is entitled to choose the highest of the
3:
1. M/V on 1 Oct 2001.
2. TABC (Only if accurate records are kept)
3. 20% x (P-A)
- When VDV = M/V on 1 Oct 2001
Para 26(3): M/V could inflate the base cost of the asset
therefore 26(3) has a limitation on VDV.
M/V has been adopted and proceeds < M/V, TP must
substitute VDV with those proceeds less expenditure
allowable under para 20. (Kink Test)
EG: Co. X acquired an asset in Oct 1990 @ cost of R1000.
In 1999 an additional R100 was spent on asset.
In 2004 additional R200 spent on asset.
Asset was sold in September 2017 for R1500.
M/V on 1 Oct 2001 = R1800
Sol: Step 1: Consider Para 26? (P>Expenditure) Yes.
Proceeds: 1500
Exp: (1000 + 100 + 200) = 1300
26(3): Proceeds < M/V; Yes. There VDV is longer M/V but
proceeds – expenditure. (1500 – 1300 = 200).
VDV = 200
Cap gain/loss = Proceeds - BC(VDV + A)
1500 – (200 + 1300)
Nil (The aim of the kink test is to create
neither a cap gain nor loss)
- VDV where expenditure can’t be determined, therefore
TP does not have a record of expenditure, VDV is 1. M/V
2. 20% of (P-A). Kink test does not apply where
expenditure can’t be determined.
Time of Disposal: (Para 13)
- Para 13(1) time of disposal for the seller
- Para 13(2) provides the time that the acquirer bought
the asset from the seller.
- Most disposals result in a change in ownership.
- If asset is diposed of i.t.o. an agreement which is
subject to a suspensive condition; time of disposal =
when condition is met.
- If agreement has no suspensive condition; time of
disposal = when agreement is concluded.
Capital losses i.r.o connected persons (Para 39)
- “Clogged loss” rule = certain losses on disposal of
assets to a connected person are disallowed but not
lost.
Losses are clogged and become unclogged when
further sales are made by the TP to that same person if
still connected.
- A person must disregard a capital loss arising from
disposal of an asset to any person:
1. Who is connected immediately before disposal
2. Member of same group of companies immediately
after transaction.
3. Trust with beneficiary which is a member of same
group of companies.
- Connected person excludes relative other than parent,
child, stepchild, brother, sister, grandchild or
grandparent.
- If transaction brings about a capital loss; loss is ring-
fenced and can’t be taken into account in CYoA
therefore roll forward.
- Capital loss will only be allowed to be deducted from
future cap gains if still connected to that person. If not
connected = loss is lost forever
Capital Gains Tax
TABC (Para 30)
- Achieves the value on 1 Oct 2001
- By adding subsequent costs (incurred after 1 Oct 2001)
- TAB Method requires the TP to know when asset was bought, for
how much and also the cost of improving the asset over the period
of time owned.
- Para 30(1): Basic Formula
Y= B + [(P-B) x N]
(T + N)
Where:
Y = VDV
B = Expenditure (para 20) before 1/10/2001
P = Proceeds (defined as per para 35)
N = No. of yrs from date acquired to 30/09/2001
T = No. of yrs from 1/10/2001 to date of disposal
B = After deducting all allowances therefore Tax Value
N= Ltd to 20 years, where expenditure allowable incurred in more
than one year
Part of a year = 1 FULL year.
T= Part of a year = 1 FULL year.
- Para 30(2): Adjusted TAB
Here expenditure as per para 20 is incurred before and after
1/10/2001.
Proceeds need to be allocated to pre and post valuation date
expenditure
Adjusted proceeds is substituted in TAB formula
P=Rx B
(A +B)
Where:
P = Proceeds to be used in basic TAB formula
R = Adjusted TOTAL proceeds (Proceeds – Qualifying Selling
Expenses)
A= Expenditure (para 20) on/after 1/10/2001(Improvements =
T/V)
B = Expenditure (para 20) before 1/10/2001
Qualifying Selling Expenses: remuneration of surveyor/valuer,
transfer costs, stamp duty, advertising cost.
- Para 30(3): Depreciable Asset Formula
- THREE requirements need to be met to use this formula:
1. Must be expenditure before and on/after 1/10/2001.
2. Must have claimed allowances
3. Must be in a profit situation therefore P>BC (Cap Gain)
Y= B + [(P1-B1) x N] P1 = R 1 x B1
(T + N) (A1 + B1)
Where:
P1= Proceeds attributable to expenditure in B1
R1= Total Proceeds + amts recovered/recouped
B1= Expenditure before 1/10/2001 + recoupment
A1= Expenditure on/after 1/10/2001 + recoupment
 DONATIONS: STEPS TO CALCULATE CGT: DISCHARGE OF DEBT: PARA 12A
- Deemed Proceeds: Para 38 - Before 1/10/2001: - On/after 1 Jan 2013
If TP disposes of an asset to any other person Cap gain/(loss): Proceeds – Base Cost - A debtor would have to account for a reduction in the
(connected/not) by way of a donation: Base Cost= VDV + A base cost of an asset or a reduction in assessed capital
Donor is deemed to have disposed of that asset for Proceeds = SP – Recoupment loss.
proceeds = M/V on date of donation. Recoupment = SP (Ltd to COST) – Tax Value - For para 12A to apply there must be an inability to pay.
SP > COST; Use COST - Debt benefit = amt you owe.
- Base Cost: Para 22 SP < COST; Use SP - Allowance asset: qualifies for S11(e), S12C, S13,
- Donee is deemed to have acquired asset for Tax Value = Cost – ALL allowances S13quin, S13sex, S13sept & s12E.
consideration = to M/V on date donation took place - Non-allowance asset: doesn’t qualify for allowances
- Donations Tax is payable by donor when asset is - After 1/10/2001: therefore land & buildings.
donated, a portion of donations tax is include in the Cap gain/(loss): Proceeds – Base Cost Triggered by 12(A) + S19
base cost for purposes of calculating cap gain/loss. Proceeds = SP – Recoupment - Trading Stock = triggers s19.
- If formula yields a “-ve” answer, portion of donation Recoupment = SP (Ltd to COST) – Tax Value - Non-connected persons:
tax is limited to 0 SP > COST; Use COST
- If TP realises a cap loss before including the portion of SP < COST; Use SP
donations tax in the base cost; portion will NOT be Tax Value = Cost – ALL allowances (aka Base Cost) Inability
included in the base cost. to pay
- If donor fails to pay over the donations tax in DISCHARGE OF DEBT CONT: Para 56 Allowance Non-Allowance
prescribed time, donor can’t add the portion to the - Debtor and creditor are connected persons Asset Asset
base cost and the done will be liable for the - Para 56 overrides para 39. On Sold On Sold
donations tax. - Provides that the loss arisimg from the disposal of a Hand
Hand
- Value of donations tax in 1st semester will be given. loan to a connected person can be claimed in all the Reduce BC Recoupment Reduce
Reduce ACL
Y=M–A xD 12A(3) S19 + 8(4)(a)
following circumstances: BC
M Recoupment
1. Write-off reduces base cost of an asset of a debtor Reduce
Where: ACL
2. Write-off reduces aggregate cap loss of debtor S19 + 8(4)(a)
Y= Amt to be added to the base cost
3. Write-off included in GI (recoup) - Know the exceptions
M= M/V of asset donated
4. Write-off reduces assessed loss. - Debtor & Creditor Relationship:
A= Base Cost of the asset
D= Donations Tax
- DON’T DISREGARD THE LOSS MADE, therefore carry For the debtor: Debt results in a cap gain but is not
If A>M = no donations tax will be added to the forward! taxed on cap gain therefore isn’t taxed to pay debt.
base cost. For the creditor: makes a cap loss. Debt = asset
NOTE: If donations tax is paid by the done, their base therefore amt owed = asset. Debt waived gets nothing.
cost is increased in the following way: Proceeds = 0. BC= amt of debt; therefore cap loss.
Capital Gain of DONOR
M/V OF THE ASSET x Donations Tax
Capital Gains Tax