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CAPITAL GAINS TAX

PART 1

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NOTE
• CGT is a big section that will be asked throughout the year. You must spend
enough time on this section.
• Please refer to the SAICA examinable pronouncements. Most of the 8th
Schedule is examinable. You must work through the Act for the sections not
covered in detail in these notes.
• If you have struggled with CGT it is important that you focus on the basics. 90%
of CGT can be answered by applying the basic knowledge you picked up in
undergrad. Do not focus on the advanced sections until you are 100% satisfied
that you know how to do a basic CGT calculation. CGT is really simple if you
break it into components.
• Your greatest challenge is that CGT may contain aspects of topics you have not
yet covered this year (such as capital allowances which will only be covered
later).
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INTRODUCTION
• CGT is an income tax on capital
• In simple terms, when a taxpayer’s assets increase in value there is CGT on it
• This increase in value can be taxed in two ways
• Realised capital gain (when asset is sold)
• Unrealised capital gain (when the asset is NOT sold but CGT is still calculated)
• CGT was introduced on 1 October 2001
• This is called the valuation date
• Important date and important title – we will refer to it often
• You must understand the capital vs revenue debate you studied for Gross
Income
• Find CGT in the Eighth Schedule to the Income Tax Act
• Note that references to Eighth Schedule are “paragraphs” and NOT “sections”
• i.e. para 1, para 2, para 3 and NOT s1, s2, s3

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SELLING AN ASSET

REVENUE GROSS
SALE OF IN NATURE INCOME
ASSET CAPITAL IN POSSIBLE
NATURE CGT

LECTURE EXAMPLE 1

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CAPITAL GAIN vs TAXABLE CAPITAL GAIN

Perform this calculation for
CAPITAL GAIN each asset that is disposed of. TAXABLE CAPITAL GAIN
PROCEEDS TOTAL CAPITAL GAINS
Less: BASE COST Less: TOTAL CAPITAL LOSSES
= CAPITAL GAIN/(LOSS) (para (3) & (4)) Less: ANNUAL EXCLUSION (R40 000) (for Natural Persons)
(para (5))
The “capital gains” feed into = AGGREGATE CAPITAL GAIN/(LOSS) (para (6) & (7))
the “taxable capital gain” Less: CAPITAL LOSS BROUGHT FORWARD PRIOR YEAR
calculation. = NET CAPITAL GAIN/(LOSS) (para (8) & (9))
Multiply by:
Only natural persons receive the annual 40% (Natural persons)
exclusion. 80% (Non-natural persons)
Companies do NOT receive it. = TAXABLE CAPITAL GAIN (para (10))
Included in taxable income per s26A

The annual exclusion is R300 000 in the year when a taxpayer dies. LECTURE EXAMPLE 2
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DEFINITIONS AND APPLICATION

PARTS I and II of the EIGHTH SCHEDULE

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DEFINITION OF “ASSET” (para1)

• Para1 definition of “asset”

• Includes almost all assets

• Includes items such as trading stock, even though it is used in a scheme of profit-making
• Also includes the right to receive an amount (i.e. debtors, debit loans, fixed deposit)
• Note that it excludes currency. There is thus no CGT if one person gives money
to another person. There is also no CGT on foreign exchange gains/losses. Note
that a fixed deposit at a bank is NOT currency; it is the right to claim money
from the bank that is considered an asset.
• IMPORTANT: You must show the CGT calculation when you selling trading
stock, even though the capital gain will always be Rnil.
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APPLICATION OF CGT (para2) This paragraph explains

which assets are inside
the “CGT net”
(as discussed in the
DISPOSAL of ANY video lecture)
Resident ASSET
Assets of a permanent
CGT applies establishment in SA
DISPOSAL of ONLY the
Non-resident following assets:
Immovable property
in SA

Includes equity shares held in a company if

- 80% or more of the MV of the equity shares is attributable to immovable property
LECTURE EXAMPLE 3 in SA; AND
- The taxpayer together with any connected person holds 20% or more of the equity
share

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PARA2

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WHAT’S INSIDE OUR “CGT NET”? (para2)

RESIDENTS:

Any asset that is disposed of by the resident

NON-RESIDENTS:
Disposal of:
- Immovable property in SA
- Assets attributable to a permanent establishment in SA

CGT can only be calculated for the period the asset spent inside the
“CGT Net”
EXPLANATION EXAMPLE: SOLUTION:
Mr X sells an asset. The proceeds is R1 000 000 and the base Proceeds R1 000 000
Base Cost (R600 000)
cost is R600 000.
Capital Gain R400 000
Mr X owned the asset for 10 years. Assume that the asset was
inside the “CGT net” for 7 years. Subject to CGT:
How much of the capital gain will be subject to CGT? R400 000 x 7y/10y = R280 000

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COMPONENTS OF CGT

Base
Asset Disposal Proceeds
(paras 11,12)
Cost
(para 1) (paras 35 - 43)
(paras 20 - 34)

Study each of these components separately. Once you understand each of these, it is easy
to bring everything together. Each component is equally important.

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ASSET LECTURE EXAMPLE 4

• We have already covered the para1 definition of “asset”
• Refer to para 53 for “personal use assets”
• There are NO capital gains or losses on personal use assets
• A personal use asset is an asset of a natural person that is used mainly for purposes
other than the carrying on of a trade. (i.e. mainly not for trade)
• The following assets are NOT personal use assets even if they are not used for trade
at all:
• Coin made mainly from gold or platinum on which the market value is attributable to the
material it is made of
• Immovable property
• Aircraft that weighs more than 450kgs when empty
• A boat longer than 10metres
• Financial instrument (e.g. shares)
• Refer to the paragraph for the rest
• Refer to para 15 for situation in which no capital losses will be allowed
• No capital losses allowed on aircraft that weighs more than 450kgs or boat longer than
10metres
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DISPOSALS & ACQUISITION OF

ASSETS
PART III of the EIGHTH SCHEDULE

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DISPOSALS

ACTUAL DISPOSALS
(para11)
DISPOSALS

Students often don’t pay enough attention to DEEMED DISPOSALS

this and don’t even realise when a question
contains deemed disposals. (para12)
Focus on this. It is very popular in CTA and
tested often.

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DISPOSALS (GENERAL)
• Para 11 explains what a disposal is. It is a very broad description.
• A situation where a taxpayer had an asset and then no longer had the asset is a
disposal: Refer to Para 2 again. Very important that
• E.g. sale, donation, scrapping, dividend in specie you understand this fully. Do NOT
• Remember the “CGT net” mentioned earlier? continue until you are happy with this.
• Assets which are subject to CGT are included in the “CGT net”
• If assets move from inside to outside the CGT net there is a deemed disposal
• E.g. a capital asset becomes trading stock
• E.g. a non-resident has an asset attributable to a permanent establishment in SA that is no
longer attributable to a permanent establishment in SA
• If assets move from outside to inside the CGT net there is a deemed disposal
• E.g. trading stock becomes a capital asset
• E.g. a non-resident has an asset that is not attributable to a permanent establishment in SA and
it becomes attributable to a permanent establishment in SA

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ACTUAL DISPOSALS (para11)

• Work through para11(2) for situations which are NOT disposals

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DEEMED DISPOSALS (para12 and s9H)

• A deemed disposal is NOT an ‘actual/real’ disposal
• No asset is being realised through sale
• A deemed disposal takes place when there is a change in status
• We will see this when assets move in and out of the “CGT Net”

CGT can only be calculated for the period that the asset is/was in the “CGT Net”
The “deemed disposals” section achieves this by calculating a disposal when the asset moves in and out of the
“CGT Net”.

The deemed disposals will either

• calculate a capital gain/loss when the asset leaves the CGT net
• calculate a base cost when the asset enters the CGT net

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ILLUSTRATION: LEAVING “CGT NET” Focus on understanding

the PRINCIPLE here

INSIDE THE “CGT NET” OUTSIDE THE “CGT NET"

Beginning of Tax Year Date of change in End of Tax Year

status

Taxpayer treated as if asset purchased.

There is a deemed disposal.
Treated as if purchased at Market Value
Asset treated as if it is sold at Market Value.
(cost = Market Value).
Calculate CGT
Calculate Base Cost
Proceeds = Market Value
Base Cost = Market Value

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ILLUSTRATION: ENTERING “CGT NET” Focus on understanding

the PRINCIPLE here

OUTSIDE THE “CGT NET" INSIDE THE “CGT NET”

Beginning of Tax Year Date of change in End of Tax Year

status

Taxpayer treated as if asset purchased.

There is a deemed disposal.
Treated as if purchased at Market Value
Asset treated as if it is sold at Market Value. (cost = Market Value).

There should not be any CGT as it is outside Calculate Base Cost

the “CGT net”
Base Cost = Market Value

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WHAT DOES PARA 12 COVER?

TAXPAYER/ASSET IS TAXPAYER/ASSET BECOMES REFERENCE

Non-Resident Resident Para12(2)(a)
Non-resident has a permanent establishment Non-resident does not have permanent Para12(2)(b)(ii)
in SA establishment in SA
Non-resident does not have permanent Non-resident has a permanent establishment Para12(2)(b)(i)
establishment in SA in SA
Capital asset Trading Stock Para12(2)(c)
Personal use asset Not a personal use asset Para12(2)(d)
Not a personal use asset Personal use asset Para12(2)(e)
Trading Stock Capital asset Para12(3)
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PARA 12

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PARA 12

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s9H: CHANGE OF RESIDENCE

• s9H applies when a Resident of SA becomes a Non-Resident
• Remember, in terms of para 2 ALL assets of a resident are in the “CGT
Net” but for a Non-Resident the only assets in the “CGT Net” are:
• Immovable property in SA
• Assets attributable to a permanent establishment in SA
• Thus, when a resident becomes a non-resident then there are a number
of assets that will be leaving the “CGT Net” and only a few that remain
• There is thus a deemed disposal and the assets leaving the “CGT Net” are treated
as if they had been disposed of at market value
• The year of assessment is deemed to have ended immediately before the
day on which that person ceases to be a resident (s9H(2)(b))
• A new year of assessment is deemed to start on the day the taxpayer
becomes a non-resident (s9H(2)(c))

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WHAT DOES s9 COVER?

s9H

A resident (not a company) becomes a A resident company becomes a non-

non-resident resident
s9H(2)(a) s9H(2)(3)

Assets deemed sold at market value as a Assets deemed sold at market value as a
resident resident
and then and then
purchased as a non-resident at market value purchased as a non-resident at market value

The following assets will NOT be subject to s9H (s9H(4)): Deemed to pay a dividend in specie equal to
• Immovable property in SA (s9H(4)(a)) Market value of shares
• Assets of a permanent establishment in SA (s9H(4)(c)) less s9H(3)(c)(iii)
• s8C shares that have not yet vested (s9H(4)(e)) Contributed Tax Capital

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s9H(2): TAXPAYER IS NOT A COMPANY

When the resident becomes a non-resident the tax year ends on the day immediately before the
taxpayer ceases to be a resident.

A new tax year commences on the day the taxpayer becomes a non-resident.

The taxpayer thus has 2 partial tax years within a 12 month period.
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s9H(3): TAXPAYER IS A COMPANY

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VISUAL SUMMARY OF ASSET STATUS

CURRENT STATUS NEW STATUS
RESIDENT becomes NON-RESIDENT
NON-RESIDENT becomes RESIDENT
CAPITAL ASSET becomes TRADING STOCK
TRADING STOCK becomes CAPITAL ASSET
CAPITAL ASSET becomes PERSONAL USE ASSET
PERSONAL USE ASSET becomes CAPITAL ASSET
LECTURE EXAMPLE 5

The asset is “purchased

The asset is “sold” as …
back” as …

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PROCEEDS
PART VI of the EIGHTH SCHEDULE
Paras 35 – 43
Please note that some of the sections relating to proceeds will be discussed later in these
notes

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PROCEEDS

Para38
DEEMED
PROCEEDS
s9HA
PROCEEDS
ACTUAL
Para35
PROCEEDS
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ACTUAL PROCEEDS - PARA35

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Such as RECOUPMENTS
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ACTUAL PROCEEDS - PARA35 LECTURE EXAMPLE 6

• Proceeds is the amount that an asset was sold for.
• Any recoupment that is calculated must be DEDUCTED from the proceeds
(para35(3))
• What’s the reason? If an amount has been included in gross income, it must be deducted from
the proceeds (this is to avoid taxing the same amount twice)
• The following amounts are specifically included in proceeds:
• The amount by which debt owed (by the seller) has been reduced
• EXAMPLE: X Ltd owes ABC (Pty) Ltd R100 000. X Ltd sells an asset to ABC (Pty) Ltd and they agree that the
R100 000 owed by X Ltd to ABC (Pty) Ltd will be written off and that ABC (Pty) Ltd will pay X Ltd R40 000 in
cash.
• The total proceeds for the asset sold by X Ltd will be R100 000 + R40 000 = R140 000
• Any amount received by the LESSEE from the lessor for leasehold improvements made to the
leased property by the LESSEE.
• EXAMPLE: Lessee Ltd leases a property from Lessor Ltd. In terms of the lease agreement, Lessee Ltd had to
build a new warehouse on the property. Lessor Ltd paid Lessee Ltd R1 000 000 for this warehouse.
• The R1 000 000 will be proceeds for Lessee Ltd

Selling expenses are NOT deducted from proceeds but will be added to base cost
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DEEMED PROCEEDS (para38) LECTURE EXAMPLE 7

• When there is a sale of asset between connected persons and it is not at arm’s length then:
• The seller is treated as if the asset was sold at MV
• The buyer is treated as if the asset was purchased at MV
REMEMBER:
• When an asset is donated then that the person who
paid the donations tax
• The donor is treated as if the asset was sold at MV includes an amount
• The donee is treated as if the asset was purchased at MV per para22 (donor) or
para20(1)(c)(viii)

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BASE COST
PART V of the EIGHTH SCHEDULE
Paras 20 – 34

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BASE COST

ASSETS ACQUIRED ASSETS ACQUIRED AFTER

BEFORE 1 OCTOBER 2001 1 OCTOBER 2001

Para20 costs
Valuation date value
LESS allowances claimed
(paras25, 26, 27) DIFFERENT
(para20(3)(a))
PLUS
PLUS

Para20 costs on or after 1

SAME Para20 costs on or after 1
October 2001
October 2001

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PARA20
• Para20 provides a list of costs that may be included in the base cost of an
asset
• It is the cost of buying, selling and improving the asset
• Para20(2): It does NOT include the cost of
• Borrowing costs (including interest), raising fees, bond registration costs or bond
cancellation costs
• Repairs, maintenance, insurance, rates and taxes
• Except for para20(1)(g) interest
• If the asset is a listed share
• Any amount that has been allowed as a deduction from income tax (such as
capital allowances) must be deducted from base cost (para20(3)(a)).
• What’s the reason? This is to avoid a situation where the taxpayer receives a tax
benefit twice (as a deduction and as an amount added to base cost). This is the same
principle as deducting the recoupment from proceeds per para35(3)(a).

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PARA 20

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PARA 20: WHAT MAY NOT BE ADDED TO BASE COST?

LECTURE EXAMPLE 8

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BASE COST OF PRE-VALUATION DATE ASSETS

ASSETS ACQUIRED Valuation date value

BEFORE 1 OCTOBER 2001 (paras25, 26, 27)
PLUS

Para20 costs on or after 1

October 2001

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VALUATION DATE VALUE

• “Valuation date value” refers to the value of the asset on 1 October 2001
• As CGT was only introduced on 1 October 2001, we need to determine a value
for assets on that date so that the capital gains/losses calculated only take into
account the change in value from that date
EXAMPLE:
Mr X bought an asset in 1990 for R100 000. He sells it today for R2 000 000. The
asset was worth R500 000 on 1 October 2001.
In this case there would be a total growth of:
R2 000 000 – R100 000 = R1 900 000.
However, only the growth from 1 October 2001 may be taxed. Thus the capital
gain would be R2 000 000 – R500 000 = R1 500 000.
The R400 000 difference between the two amounts is the growth from 1990 to 1
October 2001:
R500 000 – R100 000 = R400 000. This is not subject to CGT.

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VALUATION DATE VALUE

• Valuation date value can be 1 of the following:
• Market value on 1 October 2001 (will be given in exam)
• Time-apportionment base cost (TABC) (will be given in exam)
• 20% x (proceeds less para 20 costs after 1 October 2001) (you will calculate this)
• Proceeds less para 20 costs after 1 October 2001 (you will calculate this)

• How do you know which one to use?

• Paras 26 and 27 gives you instructions
• Refer to the LECTURE EXAMPLE on Para26 and Para27 for detailed steps to follow in
determining the valuation date value

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PRIMARY RESIDENCE EXCLUSION

PART VII of the EIGHTH SCHEDULE
Paras 44 – 51
This section is always popular when it comes to natural persons.

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PRIMARY RESIDENCE EXCLUSION

• This applies to Natural Persons
• This section is simple, but often misunderstood
• From the start you need to understand the following: the primary
residence exclusion is applicable to the PERIOD that the asset was used as
a primary residence
• This PERIOD can only be when a person is a RESIDENT and it can only be
for the time after 1 October 2001
• Why? Because the “CGT Net” only started existing on 1 October 2001
• Remember the IMPORTAT PRINCIPLE: We can only calculate CGT for the period
that the asset was inside the “CGT Net”

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DEFINITIONS (para44)

• Only applies to NATURAL PERSONS or special trusts

• Must be MAINLY (i.e. more than 50%) used for domestic purposes Refer to paras 47 & 49

• Any portion that is used for business is NOT a primary residence and does NOT qualify
for the primary residence exclusion
• Depending on the situation, this business portion can either be a period of time
AND/OR a percentage of the house (e.g. used as a home for 5 years and an office for 2
years or a house where 10% of the house is used as an office)
You must always split the capital gain into the portion that relates to the Primary Residence and the portion
that is NOT a primary residence (this can be a % of property and/or a period of time).
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PRIMARY RESIDENCE EXCLUSION (para45)

How does the exclusion work?

R2million of capital gain/loss on

Para45(1)(a) primary residence portion is
excluded
Para45

Para45(1)(b) No capital gain is calculated

Applies when proceeds is R2million or less.

Must still calculate and include any capital losses

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GENERAL PRINCIPLE (para45)

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PARA45(1)(b)
• If the primary residence was sold and the proceeds does not exceed R2million
then there is no capital gain/loss calculated
• You don’t have to perform a calculation—just note that you are applying the
rule
• Para44(4): This section does NOT apply if:
• There was any PERIOD OF TIME that the house was not used as a primary residence; OR
• If any % of the house was not used as a primary residence
• EXAMPLE 1: Mr X owned a house for 20 years. He stayed in it for 18 years and
let it out for 2 years. Para45(1)(b) may not apply.
• There will be a capital gain on the portion that was not used as a primary residence (2 out
20 years) (para47)
• EXAMPLE 2: Mr Y owned a house. He used 5% of the house as an office.
Para45(1)(b) may not apply.
• There will be a capital gain on the portion that was not a primary residence (5%) (para49)
You can only apply para45(1)(b) if:
- The asset was used 100% of the time as a primary residence AND
- 100% of the property was used as a primary residence
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PARA45(1)(a) LECTURE EXAMPLE 10

• This paragraph applies when a capital gain (or loss) is calculated on the disposal of a
primary residence
UTTERLY
• R2million of the capital gain/loss calculated will be excluded IMPORTANT!
Proceeds XXX We NEVER apportion
the R2million except if
Less: Base Cost (XXX) OWNERSHIP is split (e.g.
= Capital Gain XXX when married in
community of property)
Primary residence exclusion (para45(1)(a)) (R2 000 000)
We do NOT apportion it
= Capital gain XXXX for time periods. Only
• This exclusion is available PER RESIDENCE and NOT per person for ownership.
• This means that you can get it for every asset you’ve ever used as a primary residence (but only
for the portion of time that it was used as a primary residence)
CAREFUL!
Most students make the mistake to think the primary residence exclusions is per person.
Don’t be one of those people!
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SIZE OF PRIMARY RESIDENCE (para46) LECTURE EXAMPLE 10

• Only 2 hectares may qualify as a primary residence exclusion

• If property exceeds 2ha then:
• Part of the capital gain will relate to a primary residence (2ha)
• Part of the capital gain will NOT be a primary residence (excess over 2ha)

This paragraph also explains that if you sell your primary residence then the land it is situated on will qualify as part of
the primary residence if you sell it at the same time and to the same buyer.

In other words, if you sell the residence to one person and the land to someone else then the capital gain/loss on the
land will NOT qualify for the primary residence exclusion. (Very rare to see this in exams.)

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PARAS48 & 50
• We know now that the primary residence does not apply to the part of
the capital gain that relates to
• A period that the person did not stay in it as a primary residence (para47); AND
• The portion that it was used for business purposes (para49)
• Paras48 & 50 provide us with special rules relating to this

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• This means that even though the person did not use it as a primary
residence for up to 2 years, the person may still be treated as if they did
(para48)
• It means that even though the person used it for business purposes
(renting it out) the person may still be treated as if they used it 100% for
primary residence purposes (para50)
LECTURE EXAMPLE 10

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