Capital Gains Tax (CGT) was introduced in South Africa on 1 October 2001 and affects individuals, companies, and trusts on disposal of assets. All capital gains and losses made on the disposal of an asset are subject to CGT, unless specifically excluded. Technically, Capital Gains Tax is not a separate tax and forms part of Income Tax, although it is calculated differently. Provisions for CGT are contained in the Eighth Schedule to the Income Tax Act 58 of 1962. The Eighth Schedule determines a taxable capital gain or assessed capital loss and section 26A of the Act provides that the taxable capital gain must be included in the taxable income.
How to Determine a Capital Loss or Gain
To determine a capital loss or gain, you need to understand the 4 key definitions stated in the Eighth Schedule.
Asset: An asset is widely defined and includes property. Capital Gains Tax applies to all assets disposed of on or after 1 October 2001, regardless of when it was acquired. However, only the capital gain or capital loss attributable to the period on or after 1 October 2001 must be brought to account for CGT purposes.
Disposal: A disposal refers to any action which results in the creation, variation, transfer, or extinction of an asset. It also includes specific events treated as disposals, such as the change in the use of an asset, the commencement or cessation of residence, a company ceasing to be a controlled foreign company and a company becoming a headquarter company. This is particularly important for medium to large business owners.
Proceeds: This refers to the amount of money received by or accrued to the seller on disposal of the asset. Assets disposed of by donation for a consideration not measurable in money, or to a connected person at a non-arm’s-length price are treated as being disposed of for an amount received or accrued equal to the market value of the asset. Proceeds will also be treated as being at market value when specified deemed disposal events occur, such as cessation of residence, company ceasing to be a controlled foreign company, company becoming a headquarter company and conversion of a capital asset to trading stock or distribution of an asset. Amounts included in income such as a recoupment of capital allowances are excluded from proceeds.
Base cost: This variable is dependent on whether the asset was acquired: before, on or after 1 October 2001; by donation, for a consideration not measurable in money or from a connected person at a non-arm’s length price; in consequence of a deemed disposal event such as a distribution in specie, cessation of residence, company ceasing to be a controlled foreign company, company becoming a headquarter company or conversion of a capital asset to trading stock.
Aggregate Capital Gain or Loss
A company’s aggregate capital gain or loss is determined by adding the capital gains and losses on individual assets together for a specific year of assessment
Net Capital Gain or Assessed Capital Loss
A company’s net capital gain or assessed capital loss is determined by deducting any assessed capital loss brought forward from the previous year of assessment from the aggregate capital gain or loss. An assessed capital loss may be deducted only from capital gains and added to capital losses. It may not reduce taxable income.
Inclusion Rate and Taxable Capital Gain
The taxable capital gain of a company is determined by multiplying the net capital gain by the inclusion rate. For years of assessment commencing on or after 1 March 2016 the inclusion rate of a company or close corporation is 80%. For years of assessment commencing on or after 1 March 2012 it was 66,6% and before that 50%.
In determining Capital Gains Tax outcome, it is advisable that businesses should seek out the services of professionally qualified accountants and tax practitioners to deal with such matters. The finance professionals at Outsourced Finance are able to assist with your company’s tax needs. Utilizing a good capital gains tax special accountant will ensure your tax matters are handled currently and that your business remains in good standing with SARS.