Capital gains tax. Taxable capital gain

Transcription

1 Capital gains tax Marius Botha 1 Taxable capital gain See pages 74 to 80 of SARS Guide Taxable capital gain part of taxable income Gross income Less: Exemptions INCOME Less: Deductions Conventional taxable income Plus: Taxable capital gain TAXABLE INCOME

2 Steps to determine taxable capital gain To determine the taxable capital gain certain steps are to be followed These steps are derived from the definitions of various terms Capital gain and taxable capital gain are often used interchangeably (incorrectly so) 3 Capital gain Example Step 1: Calculate the capital gain separately in respect of each individual asset Asset 1 (Land) Proceeds on disposal Less: Base cost Asset 2 (Shares) Proceeds on disposal Less: Base cost Capital gain

3 Example Step 2: Determine the aggregate capital gain (par 6) A person s aggregate capital gain for a year of assessment is the amount by which the sum of that person s capital gains for that year exceeds the sum of (a) that person s capital losses for that year; and (b) in the case of a natural person or a special trust, that person s or trust s annual exclusion for that year Total capital gains Less: Capital losses Less: Annual exclusion AGGREGATE CAPITAL GAIN Example Step 3: Determine the net capital gain Aggregate capital gain Less: Assessed capital loss (previous year) Net capital gain Step 4: Determine the taxable capital gain Net capital gain Multiply by inclusion rate x 25% Taxable capital gain

4 Tax calculation Salary Interest Gross income Less: Exemptions Interest Income Less: Deductions Pension contribution RA contributions Plus: Taxable capital gain Taxable income Taxable income (brought forward) Tax on R (2007 tax year) Less: Rebate Tax payable Assessed capital losses for any year of assessment can only be set off against capital gains arising during subsequent years of assessment 8 4

5 Pre-valuation date assets A pre-valuation date asset is See page 149 of SARS Guide an asset acquired prior to valuation date by a person and which has not been disposed of by that person before valuation date 9 Base cost of pre- valuation date assets See page 149 of SARS Guide The determination of the base cost of assets held prior to the valuation date (1 October 2001), comprises of the valuation date value of the asset plus any expenditure incurred on or after that date Capital gain Proceeds Base cost Base cost Valuation date value + Post 1/10/2001 expenditure 10 5

6 Base cost of pre- valuation date assets There are three possibilities in respect of pre-vd assets if a persons disposes thereof: 1 He made a gain (historically) 2 He made a loss (historically) See page 150 of SARS Guide 3 No records kept of pre-vd expenses PS To determine historical gain or loss deduct all qualifying expenditure (pre and post 1 Oct 2001) from proceeds. 11 Example historical gain John bought a plot of land on 1 Oct 1995 for R (before VD) In 2004 he erected a building on plot for total cost of R (after VD) On he sells property for R His historical gain is R

7 Example historical loss Peter bought a plot of land on 1 Oct 1995 for R (before VD) In 2004 he erected a building on plot for total cost of R (after VD) On he sells property for R His historical loss is R Example pre-vd exp unknown Mike bought a plot an asset 1 Oct 1995 for a cash amount of R but he has no records to prove the expenditure (before VD) On he sells property for R He cannot prove his pre-vd expenses 14 7

8 The VD value must be one of Historical gain 1. Market value on % of (proceeds minus post -VD expenditure) 3. Time-apportionment base cost If MV is adopted as VDV and proceeds do not exceed MV (phantom loss) then VDV is the proceeds minus post-vd expenditure Note: This paragraph does not apply in respect of an instrument as defined in sec 24J and assets i r o which par 32(3A) is applied (weighted average). 15 Example Historical Gain William acquired an asset for R100 on 1 Oct On 1 Oct 2001 the MV is R160. On 1 May 2005 he sold asset for a proceeds of R

9 Kink test MV 160 See page 158 of SARS Guide 130 proceeds Date disposed Historical gain MV selected as VDV, but MV exceeds proceeds MV replaced as VDV by proceeds less post-vd expenditure Therefore zero 17 Time Apportionment Base Cost (Par 30) Two possibilities 1. All expenditure incurred BEFORE valuation date See page 183 of SARS Guide TABC Pre Exp + Pre period Pre + post period x Proceeds Pre exp 1 NOTE: In this formula the pre-period may not exceed 20 if the expenditure was incurred in more than one year of assessment prior to valuation date. Part of year treated as full year. 18 9

10 Time Apportionment Base Cost (Par 30) 2. Portion of expenditure incurred AFTER valuation date The same formula as above except that proceeds to be used in formula as follows: Proceeds Actual proceeds x Pre expenditure Total expenditure 19 Two possibilities Scenario 1 All expenditure here VD Scenario 2 Expenditure VD Expenditure In Scenario 1 N (the pre-period) is limited to maximum 20 yrs if pre-vd expenditure incurred in more than one year of assessment prior to VD 20 10

11 TABC example 1 (all expenditure before VD) A person acquired an asset on 1 Oct 1996 (5 years before VD) He disposed thereof on 1 Oct 2005 (4 years after VD) for R All the allowable expenditure of R was incurred prior to valuation date Expenditure R Oct 2001 P R years 4 years 1996 Total 9 years TABC example 1 cont d TABC Pre Exp + Pre period Pre + post period x Proceeds Pre exp TABC x ( ) TABC x R Capital gain, if the TABC is selected, is R (R R ) 22 11

12 TABC example 2 (expenditure before and after VD) Paul acquired an asset on 1 Oct 1983 (18 years before VD) He disposes thereof on 1 Oct 2005 (4 years after VD) for R The allowable expenditure was incurred as follows: o R on 1 Oct 1983 o R on 1 Aug 2002 R pre-exp 18 years 1 Oct 2001 Proceeds R post-exp 4years Total 22 years NB. A fraction of a year is taken as a full year. 23 TABC example 2 cont d The same method applies with the exception that the proceeds taken into account for purpose of formula must be determined as follows: P Proceeds Pre expenditure Total (post and pre) exp P

13 TABC example 2 cont d TABC Pre Exp + Pre period Pre + post period x Proceeds Pre exp TABC x ( ) TABC x R Total base cost R R Capital gain if the TABC is selected, is R ( ) 25 Historical loss Proceeds do NOT exceed expenditure MV Determined on VD (two possibilities) A B Pre VD expenditure exceeds or proceeds AND exceeds MV on Pre VD exp do NOT exceeds or proceeds AND exceeds MV on See para on page 160 of SARS Guide Then the VDV is HIGHER of: MV (on ), and Proceeds minus post-exp Then VDV is LOWER of: MV (on ), or TABC (always TABC) MV not determined on VD (or not in Gazette) VDV TABC 26 13

14 Example (Pre VD Shares Sold) Taxpayer makes economic profit (proceeds exceed expenditure) Share acquired on for R120 MV on (Gazette) is R100 Proceeds on sale is R250 1) MV R100, or 2) 20% (R250 0) R50, or 3) TABC x R Example (Pre VD Shares Sold) MV 20% Proceeds TABC Proceeds Less: Base cost Capital gain TABC is best option in example (smallest gain) 28 14

15 Pre-valuation date expenditure cannot be determined See page 149 of SARS Guide Where the pre-valuation date expenditure cannot be established by the taxpayer or SARS the VDV will be The MV on VD, or 20% of (proceeds minus post-vd expenditure) (taxpayer can select) 29 Identical Assets (par 32) Identical assets is defined as a group of similar assets which (a) (b) if any one of them was disposed of, would realise the same amount regardless of which of them was disposed of; and is not able to be individually distinguished apart from any identifying numbers, which it may bear. See para 8.26 on page 149 of SARS Guide 30 15

16 Holding of identical assets The following are separate holdings of identical assets All A class shares in Elle Ltd All B class shares in Elle Ltd All 12% preference shares in Elle Ltd All 10% preference shares in Elle Ltd 31 Identical Assets (par 32) Three methods 1. Specific identification SPID (any identical asset) 2. First in first out FIFO (any identical asset) 3. Weighted average WABC (only for) The weighted average method may only be used for listed financial instruments interests in collective investment schemes coins made mainly of gold or platinum section 24 J instruments See para on page 200 of SARS Guide 32 16

17 Identical Assets (par 32) If WABC is selected for any identical asset in any of the 4 items listed above it must be used for all assets in that item. Example. Jon only buys listed shares. On VD he had 100 ABC Ltd shares. Then bought 500 ABC Ltd in In 2003 sold 300 ABC Ltd shares and used WABC. In 2004 he bought 200 XYZ Ltd shares. Can only use different method once entire holding of listed shares have been sold. 33 Specific Identification - example John holds the following units in a collective investment scheme Date purchased Units Cost per unit Cost 1/10/ /11/ /12/ /01/ On John sold 125 units His records show that he sold 50 of the units acquired on 1/11/2001 and 75 of the units acquired on 1/12/

18 SPID continued The base cost of the 125 units sold is: 50 R1.60 R R1.70 R Base cost R First in First Out With this method it is assumed that the oldest units are sold first. The 125 units sold will be Bought on 1/10/2001 at R1.50 Bought on 1/11/2001 at R1.60 Base cost R R Date purchased Units Cost per unit Cost 1/10/ /11/ /12/ /01/

19 Weighted Average Base Cost (par 32) See para on page 201 SARS Guide Units in CIS on 1/10/2001 Units bought on 31/01/2002 Units bought on 15/03/2002 Base cost of total units (-100) Sold on 1/07/2002 (proceeds) Less: WABC ( ) x 100 CAPITAL GAIN Remaining BC (R3 520 R260.74) Units bought on 1/08/2002 Base cost of total units WABC (par 32) (-250) Brought forward Sold on 1/09/2002 (proceeds) Less: WABC ( ) x 250 CAPITAL GAIN (-1 200) Remaining BC ( ) Units sold on 1/10/ Less: WABC ( ) x CAPITAL GAIN

20 Comparison Units 100 Date CPU 1-00 Expen R R R R Market value on as per Gazette is R1-20 per unit After 1 October 2001 he sells the following units (SPID). Date sold Units sold Unit proc Total proceeds R R125 R SPID Date sold Units sold Unit proceeds Total proceeds acquired R acquired R acquired R

21 Historical loss SPID summary MV on VD % of P TABC Pro- Pre E Proceeds Less BC Capital gain (5.00) Total gain/loss Loss of R FIFO Date sold Units sold Unit proceeds Total proceeds acquired R acquired R acquired R

22 120 MV replaced by Proceeds 115 FIFO summary Historical loss MV on VD % of P TABC Pro- Pre E Proceeds Less BC Capital gain Total gain/loss Gain of R WABC summary Proceeds WABC ( ) (5.00) No capital gain 44 22

23 Final comparison SPID FIFO WABC Gain/loss (R3.00) R Best 45 Post VD acquisitions Bought CIS units as follows Date Num CPU R1,10 R1, R1,20 R1, R1.30 R1,30 Sold and used SPID SP Proc C/gain (04) R1,40 R140 R (03) R1,50 R150 R (02) R1,60 R160 R50 Total capital gain R

24 Post VD acquisitions Sold and used FIFO SP Proc C/gain (02) R1,40 R140 R (03) R1,50 R150 R (04) R1,60 R160 R30 Total capital gain R90 Sold and used WABC Proc WABC C/gain R R R R R R40 Total capital gain R90 47 PV of Gains SPID FIFO WABC PV at 6% R82,80 R85,00 R83,

25 Life insurance No exclusion in respect of disposal of longterm policy with foreign insurers If long-term policy is disposed of by the original beneficial owner the capital gain is disregarded. See para 12.4 on page 288 of SARS Guide 49 When exempt Payable to original beneficial owner. If not payable to original beneficial owner also exempt if payable to spouse nominee dependant as per Pension Funds Act; provided no amount paid in respect of cession of the policy

26 Example John cedes a policy that he owns to Carl during his lifetime. John dies and the policy pays to Carl. Carl is not the original beneficial owner. He is not a nominee. Nominee refers to situation where the insured remains the original beneficial owner. Carl is cessionary not nominee. 51 Example Vincent effects a policy on his own life and then cedes it to Barry. After a few years Barry cedes the policy back to Vincent. Vincent is still the original beneficial owner

27 Policy to former spouse Divorce order Marital like union, agreement of division made an order of court. 53 Employee/director exclusion Amount received where person was employee or director that person s life was insured under the policy premiums paid by employer were deducted under section 11(w) disregarded Applies in respect of keyman and deferred compensation policies ceded to employee/director

28 Income tax position On leaving of service and cession of policy, the value of policy included in employees gross income. Value so included forms base cost when policy pays out or is ceded. The gain must be disregarded. 55 Buy-and-sell policies A and B are partners and effect policies on each other s lives in terms of a buy-and-sell agreement. A dies. The policy on his life pays to B. The gain is exempt. B is the original beneficial owner

29 Policies ceded to life insured The business comes to an end. Partnership is dissolved. Policies ceded to life insured. Gain exempt provided life insured paid no premiums where policy was owned by other partner. 57 Group life policies Where employee pays all the premiums under a group life policy and that employee or his or her nominees are the beneficiaries under the policy, it is accepted that the employee is the beneficial owner of the policy

30 CGT on second-hand policies When is there a disposal? cession [p11(1)(a)] maturity [p11(1)(b)] surrender [p11(1)(b)] withdrawal (whole or part) [p11(1)(b) and 33] donation [p11(1)(a)] death [p40] cessation of residence [p12(1)(1)] commencement of residence [p12(4)] 59 Guaranteed capital fund Every withdrawal triggers a disposal. With every withdrawal it is necessary to determine capital gain or loss. The withdrawals amount to part disposals

31 Pro rata BC Part Disposals MV of part disposed MV of entire asset x See para on page 206 SARS Guide Base cost entire asset Tony buys an endowment policy from Ian (the original owner) for an amount of R on 1 Oct The policy is five years old and paid-up. As from 1 March 2006 Tony starts taking sixmonthly withdrawals. The first withdrawal is on 1 March His capital gains in respect of this policy for the tax year 2007 will be as follows: 61 Part Disposals First withdrawal (1 March 2006) Market value of policy before first withdrawal is R Total base cost Withdrawal Pro rata base cost Capital gain R R Proceeds R The remainder of base cost to carry forward is R (R R21 531) x base cost 62 31

32 Part Disposals Second withdrawal (1 September 2006) MV of policy before second withdrawal is R Total base cost Withdrawal Pro rata base cost Capital gain R R Proceeds R The remainder of base cost to carry forward is R (R R20 604) x base cost 63 Part Disposals Capital gain withdrawal 1 Capital gain withdrawal 2 Total An amount of R2 838 will be taken into account in respect of the policy when calculating his aggregate capital gain for the year 64 32

33 CGT on death On the death of a person there are CGT consequences for the deceased person in the year of his death the estate of the deceased person (separate taxable entity) See para 16.1 page 367 of SARS Guide 65 For the deceased Assessed for period 1 March to date of death. Deemed to have disposed of his/her assets to his/her deceased estate for proceeds equal to market value with 4 exceptions

34 Exceptions 1. assets transferred to surviving spouse [p67(2)(a) roll-over] 2. assets bequeathed to PBO 3. long-term insurance the proceeds of which, if it had been received by the deceased would have been exempt 4. pension fund, provident fund and RA benefits. 67 Annual exclusion R for deceased in year of death. R for estate

35 The estate [par 40(1)] Deemed to have acquired the assets from the deceased at a cost equal to market value. Assets disposed of by the executor can be divided into two categories disposals 1. to heirs, legatees or trustee of a trust 2. assets disposed of to third parties. 69 Disposals to heirs etc Treated as a disposal for proceeds equal to BC of the deceased estate. Transfer of assets to surviving spouse or PBO is not a disposal. The result is that there is no gain and no loss

36 Assets disposed of by executor to third parties Estate liable for CGT. Estate to be treated in the same manner as the deceased would have been treated. Therefore 25% inclusion rate. R exclusion in the year it comes into existence. Primary residence 2 years. 71 SARS Example Facts: Richard Spectre died on 31 August 2005 leaving the following assets: Base cost Market value Primary residence Holiday home Household furniture Yacht (11m in length) Endowment policy nd Hand endowment pol Listed shares See page 373 SARS Guide 72 36

37 Example continued In his will he stipulated that The holiday home is to be left to his surviving spouse The endowment policy is to be left to his son The second-hand policy is to be left to Retina South Africa, a registered PBO The remaining assets were to be sold and the proceeds split between his wife and son 73 Example continued Result: The capital gain or loss for Richard: Asset Base cost MV Cap Gain/loss Excl R/o Total Prim res ( ) Hol home ( ) 0 Furniture ( ) 0 Yacht ( ) Endow (50 000) 0 2 nd h End ( ) 0 L/shares

38 Example continued Sum of capital gains and losses Less: Annual exclusion Aggregate capital gain Taxable capital gain ( ) Liability of estate Facts: The saga continues. After Richard had passed away his executor, Argie Bargie, proceeded to realise the assets that had not been bequeathed to specific persons. These assets realised the following proceeds: Primary residence Furniture and effects Yacht Listed shares Proceeds In order to realise a better price for the yacht Argie Bargie had the navigation equipment upgraded at a cost of R

39 continued Result: The taxable capital gain of Richard s estate will be determined as follows: 2006 Proceeds Base cost Cap gain Furniture Listed shares continued Since the household furniture and effects are personal use assets that would have been exempt in Richard s hands, the gain in his estate will also be disregarded. The estate will be liable for CGT on the listed shares, calculated as follows: Capital gain Less: Annual exclusion Aggregate capital gain Taxable cap gain (0,25 of R50 000)

40 continued 2007 Proceeds Base cost Cap gain Primary residence Yacht The gain on the disposal of the primary residence must be disregarded as it is covered by the primary residence exclusion of R1 million 79 Continued The base cost of the yacht is its market value on Richard s death (R ) plus the R5 000 spent on upgrading it. The taxable capital gain on disposal of the yacht is calculated as follows: Capital gain Less: Annual exclusion Aggregate capital gain Taxable cap gain (0,25 of R2 500)

41 Tax Calculation Average rate Step 1: Calculate the tax by first ignoring the taxable lump sum and the taxable capital gain Salary Pension Less: Pension fund contributions Taxable income Tax as per tables on R R Tax Calculation, Continued Average rate ( ) 21,74% Step 2: Calculate the tax attracted by the taxable lump sum. 23.7% of R Step 3: Calculate tax on other income Taxable income as per step 1 Plus: Taxable capital gain Tax on R (2007) R R

42 Tax Calculation, Continued Tax on lump sum Plus: Tax on other income Total Less: Rebate Total tax payable R R