Summary
Summary Tax 399 (TAX399) - CAPITAL GAINS TAX (CGT)
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- Tax 399 (TAX399)
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- Stellenbosch University (SUN)
Summary Tax 399 (TAX399) - CAPITAL GAINS TAX (CGT)
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Chapter 28: CGT:1. INTRODUCTION:
CGT came into effect on 1 October 2001
o Therefore, a taxpayer is only taxed on capital growth on an asset after 1
October 2001
o So if the asset was purchased before 1 October 2001, the capital growth before
1 October 2001 is not taxable, but the capital growth after 1 October 2001 is
taxable.
CGT is dealt with in the Income Tax Act (s26A and 8th Schedule- there is no separate
CGT Act because it is regarded as a tax on income):
o Taxable capital gains are subject to normal tax rather than a separate CGT.
o Only a certain percentage of a person’s net capital gains will be included in his
taxable income.
Definition of gross income [s1]- also know cases:
o Amount
o Cash / otherwise
o Received / accrued
o During current YOA
o Not of a capital nature
SCOPE:
In determining whether the disposal of a particular asset will result in a capital gain,
and therefore be subject to CGT, it is first necessary to determine whether the
disposal is revenue in nature by applying the basic principles of income tax (refer to
Chapter 3). If it is determined that the disposal is revenue in nature, the gain or loss
will then be subject to normal tax, not CGT. The proceeds that are taken into account
for normal tax purposes are specifically excluded from proceeds that are used to
calculate a capital gain or loss for CGT purposes. Any expenditure allowed for
normal income tax purposes is excluded in a similar way from base cost that is used to
calculate a capital gain or loss for CGT purposes.
General Rule: The Act takes precedence over the Eighth Schedule.
Thus If an amount is included in gross income, it is not subject to CGT.
Where it fits into the framework of a natural person:
Gross income
Less: Exempt income
Income
Less: Deductions
Plus: Taxable capital gains
Minus: s18A donation deduction
Minus: s18 medical deduction
= Taxable income
Framework for companies:
Line items xxx
Plus taxable capital gain (66.6%) xxx
Less deductions (s18A) (xxx)
Taxable income xxx
Normal tax @ 28% xxx
,2. NB!! CGT calculation:
Capital gains for the year xxxxx
Capital losses for the year (xxxx)
xxxx
Less: Annual exclusion (works the same as an exemption, but must call it an
exclusion)
(only for natural persons and special trust!) (xx)
Aggregate capital gain/ (loss) xxxx
Less: Assessed capital loss previous year (xx)
Net capital gain/ (loss) xxxx
*Net capital loss: carry forward to next year
*Net capital gain: x 33.3% or 66.6% = taxable capital gain
[The above terms are very important. Thus, must know the differences between the
calculation of a net capital gain and aggregate capital gain.
For every asset, a separate calculation must be performed to determine the capital
gain/ loss]
3. PERSONS LIABLE [par2]
All persons are subject to CGT (whether registered for tax or not)
RSA resident: CGT on any asset disposed in or outside RSA
Non-resident: CGT only on
1. Immovable property (or interest in immovable property) in RSA or
2. Asset attributable to permanent establishment (always given in question- but just
regard it as a fixed place of business) through which non-resident carries on trade in
RSA
[An example of where the 2nd point becomes important is when a UK company owns
a branch in a RSA company and that branch sell assets, then the UK company will be
liable for CGT].
What is an interest?
o Interest refers to when equity shares are held, or ownership in another entity
(including a trust) or a vested right to assets within a trust if:
80% or more of the market value of his interest at the time of disposal
is attributable to immovable property AND
The non resident holds at least 20% of that interest (par 2 (2))
Then the resulting gain on the disposal of the interest will be subject to
tax.
Withholding tax [s35A]:
o If non-resident sells immovable property (or interest) in RSA, the seller will
be liable to the following withholding tax on the amount payable to him:
5% if the seller is a natural person
7.5% if the seller is a company or CC Not a final tax
10% if the seller is a trust
[Only if sales price exceeds R2 million]
o Purchaser withholds amount on behalf of non-resident and pays over to SARS
4. BASIC RULES OF CGT
Asset acquired pre 1 October 2001 – ignore pre-Valuation date growth:
, o For all assets purchased before the valuation date, a valuation must be
performed, with proof from a valuation certificate
o If this is not done, the market value of the asset can be used (namely
the listed price on 1 October 2001)
Asset acquired after 1 October 2001 – full growth included in CG
4 Requirements have to be met in order to calculate CGT:
o There must be an asset
o There must be a disposal during the YOA
o Base cost determinable. Base cost includes:
Acquisition cost of the asset
Improvement cost on the asset
Direct cost in respect of acquisition and disposal of asset
(usually installation cost)
o Proceeds must be determinable (normally referred to as selling price)
[If these 4 requirements are not met, there cannot be a capital gain or loss]
5. CALCULATION [par 3-10]:
Capital gain = Proceeds – Base cost Calculate separately
Capital loss = Proceeds < Base cost for each disposal
Hereafter calculate the sum of all capital gains or losses
NB!! Annual exclusion [par5]
o Only for individuals [NP] and special trusts
NB!! Definition of a special trust in s1:
Part (a) – a trust created for the sole benefit of a disabled
person who is incapable of earning sufficient income for his
own maintenance or from managing his own affairs
Part (b) – the will of a deceased parent, which states that the
assets are left to the children, but considers the children to be
too young to handle the assets (at least one child must be less
than 18 years old). A trustee will make decisions on behalf of
the children.
However, this annual exclusion only applies to part (a) of the definition
But the 33% inclusion rate is applicable to natural persons for both part
(a) and part (b)
o Entitled to an annual exclusion of R30 000 per person per year against
aggregated capital gains
o The annual exclusion is increased to an amount of R300 000 for the year of
assessment in which the taxpayer dies.
o Reduces the sum of the Capital Gain and the Capital Loss
o May not move from positive to negative amount (and vice versa):
For example: if there is a capital gain of 20 000 and the annual
exclusion is R30 000, the amount cannot be negative as it is limited to
0. The R10 000 is lost and cannot be carried forward to the next YOA.
NB! However, the capital loss is also reduced by the annual exclusion
After annual exclusion, we reach aggregate CG/CL
Net CG/CL = Aggregate CG/CL less assessed capital loss from previous year
o Net CG [par8]: 33.3% (NP and special trusts) or 66.6% (companies, CC’s and
ordinary trusts) included in taxable income
, o Net CL [par9]: NOTHING included in taxable income, but carried forward to
the next YOA
Remember
The limitations on the tax deduction in respect of pension fund (s 11(k)) and retirement
annuity fund contributions (s 11(n)) are not affected by a taxable capital gain, since these
deductions are based on ‘income’. The s 18 and s 18A deductions are based on ‘taxable
income’
Eighth schedule:
Disposal or deemed disposal of asset
Proceeds less base cost
Capital gain Capital loss
Apply exclusion
Apply limitations
Sum of all capital gains or losses
Reduce by annual exclusion
(Only NP’s and special trusts)
Aggregate capital gain Aggregate capital loss
Deduct previous assessed capital loss
Net capital gain Assessed capital loss
Inclusion rate carried forward
Taxable capital gain
Example:
Johnny Kabelo realises a capital gain of R50 000 on the sale of his holiday home, and
a capital loss of R10 000 on the sale of shares in his investment portfolio. He also
earned other taxable income of R200 000 during the same year of assessment. In the
previous year of assessment he had an assessed capital loss of R4 000.
Determine Johnny’s taxable capital gain and taxable income for the year
Solution:
Calculation of taxable capital gain:
Capital gain on the sale of his holiday home 50 000
Capital loss on the sale of shares (10 000)
Sum of capital gains and losses 40 000
Less: annual exclusion (30 000)
Aggregate capital gain 10 000
Less: assessed capital loss – previous year (4 000)
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