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 200 000 10 000 190 000 40 000 150 000 60 000 210 000 2 1
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 200 000 Less: Base cost 50 000 150 000 Asset 2 (Shares) Proceeds on disposal Less: Base cost Capital gain 100 000 80 000 20 000 4 2
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 170 000 0 170 000 12 500 157 500 5 Example Step 3: Determine the net capital gain Aggregate capital gain 157 500 Less: Assessed capital loss (previous year) 20 000 Net capital gain 137 500 Step 4: Determine the taxable capital gain Net capital gain 137 500 Multiply by inclusion rate x 25% Taxable capital gain 34 375 6 3
Tax calculation Salary Interest Gross income Less: Exemptions Interest Income Less: Deductions Pension contribution RA contributions Plus: Taxable capital gain Taxable income 22 500 1 750 300 000 40 000 340 000 16 500 323 500 24 250 299 250 34 375 333 625 7 Taxable income (brought forward) 333 625 Tax on R 333 625 (2007 tax year) 91 777 Less: Rebate 7 200 Tax payable 84 577 Assessed capital losses for any year of assessment can only be set off against capital gains arising during subsequent years of assessment 8 4
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
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 R200 000 (before VD) In 2004 he erected a building on plot for total cost of R400 000 (after VD) On 1.10.2006 he sells property for R2 500 000 His historical gain is R1 900 000 12 6
Example historical loss Peter bought a plot of land on 1 Oct 1995 for R300 000 (before VD) In 2004 he erected a building on plot for total cost of R500 000 (after VD) On 1.10.2006 he sells property for R600 000 His historical loss is R200 000 13 Example pre-vd exp unknown Mike bought a plot an asset 1 Oct 1995 for a cash amount of R300 000 but he has no records to prove the expenditure (before VD) On 1.10.2006 he sells property for R600 000 He cannot prove his pre-vd expenses 14 7
The VD value must be one of Historical gain 1. Market value on 1.10.2001 2. 20% 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 1998. On 1 Oct 2001 the MV is R160. On 1 May 2005 he sold asset for a proceeds of R130. 16 8
Kink test MV 160 See page 158 of SARS Guide 130 proceeds 100 160 130 100 1.10.2001 Date disposed Historical gain MV selected as VDV, but MV exceeds proceeds MV replaced as VDV by proceeds less post-vd expenditure Therefore 130 130 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
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
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 R200 000 All the allowable expenditure of R40 000 was incurred prior to valuation date Expenditure R40 000 1 Oct 2001 P R200 000 5 years 4 years 1996 Total 9 years 2005 21 TABC example 1 cont d TABC Pre Exp + Pre period Pre + post period x Proceeds Pre exp TABC 40 000 + 5 5 + 4 x (200 000 40 000) TABC 40 000 + 5 9 x 160 000 R128 889 Capital gain, if the TABC is selected, is R71 111 (R200 000 R128 889) 22 11
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 R200 000. The allowable expenditure was incurred as follows: o R30 000 on 1 Oct 1983 o R20 000 on 1 Aug 2002 R30 000 pre-exp 18 years 1 Oct 2001 Proceeds 200 000 R20 000 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 200 000 30 000 50 000 120 000 24 12
TABC example 2 cont d TABC Pre Exp + Pre period Pre + post period x Proceeds Pre exp TABC 30 000 + 18 18 + 4 x (120 000 30 000) TABC 30 000 + 18 22 x 90 000 R103 636 Total base cost R103 636 + 20 000 R123 636 Capital gain if the TABC is selected, is R76 364 (200 000 123 636) 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 1.10.2001 Pre VD exp do NOT exceeds or proceeds AND exceeds MV on 1.10.2001 See para 8.21.1 on page 160 of SARS Guide Then the VDV is HIGHER of: MV (on 1.10.2001), and Proceeds minus post-exp Then VDV is LOWER of: MV (on 1.10.2001), or TABC (always TABC) MV not determined on VD (or not in Gazette) VDV TABC 26 13
Example (Pre VD Shares Sold) Taxpayer makes economic profit (proceeds exceed expenditure) Share acquired on 1 10.2000 for R120 MV on 1.10.2001 (Gazette) is R100 Proceeds on sale 1.10.2005 is R250 1) MV R100, or 2) 20% (R250 0) R50, or 3) TABC 120 + 1 5 x 250 120 1 R146 27 Example (Pre VD Shares Sold) MV 20% Proceeds TABC Proceeds 250 250 250 Less: Base cost 100 50 146 Capital gain 150 250 104 TABC is best option in example (smallest gain) 28 14
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
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 8.26.2 on page 200 of SARS Guide 32 16
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 2002. 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 1/10/2001 100 1.50 150 50 1/11/2001 50 1.60 80 75 1/12/2001 150 1.70 255 1/01/2002 100 1.35 135 400 620 On 28.2.2002 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 1/12/2001 34 17
SPID continued The base cost of the 125 units sold is: 50 R1.60 R80.00 75 R1.70 R127.50 Base cost R207.50 35 First in First Out With this method it is assumed that the oldest units are sold first. The 125 units sold will be 100 25 Bought on 1/10/2001 at R1.50 Bought on 1/11/2001 at R1.60 Base cost R150.00 40.00 R190.00 Date purchased Units Cost per unit Cost 1/10/2001 100 100 1.50 150 1/11/2001 25 50 1.60 80 1/12/2001 150 1.70 255 1/01/2001 100 1.35 135 400 620 36 18
Weighted Average Base Cost (par 32) See para 8.26.2.3 on page 201 SARS Guide 1 000 150 200 1 350 Units in CIS on 1/10/2001 Units bought on 31/01/2002 Units bought on 15/03/2002 Base cost of total units 2.50 2.80 3.00 2 500.00 420.00 600.00 3 520.00 (-100) Sold on 1/07/2002 (proceeds) Less: WABC (3 520 1 350) x 100 CAPITAL GAIN 3.20 320.00 260.74 59.26 1 250 200 1 450 Remaining BC (R3 520 R260.74) Units bought on 1/08/2002 Base cost of total units 3.60 3 259.26 720.00 3 979.26 37 WABC (par 32) 1 450 (-250) Brought forward Sold on 1/09/2002 (proceeds) Less: WABC (3 979.26 1 450) x 250 CAPITAL GAIN 4.00 3 979.26 1 000 686.08 313.92 1 200 (-1 200) Remaining BC (3 979.26 686.08) Units sold on 1/10/2002 4.30 3 293.18 5 160.00 Less: WABC (3 293.18 1 200) x 1 200 CAPITAL GAIN 3 293.18 1 866.82 38 19
Comparison Units 100 Date 1.10.97 CPU 1-00 Expen R100-00 100 100 300 1.10.98 1.10.99 1-20 1-40 R120-00 R140-00 R360-00 Market value on 1.10.01 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 1.10.2002 100 1-15 R115 1.10.2003 1.10.2004 100 100 1-25 1-20 R125 R120 39 SPID Date sold Units sold Unit proceeds Total proceeds 1.10.2002 100 acquired 1.10.1999 1-15 R115 1.10.2003 100 acquired 1.10.1998 1-25 R125 1.10.2004 100 acquired 1.10.1997 1-20 R120 40 20
Historical loss SPID summary 1.10.2002 1.10.2003 1.10.2004 MV on VD 120.00 120.00 120.00 20% of P 25.00 24.00 TABC 123.00 111.43 Pro- Pre E 115.00 Proceeds 115.00 125.00 120.00 Less BC 120.00 123.00 120.00 Capital gain (5.00) 2.00 0 Total gain/loss Loss of R3.00 41 FIFO Date sold Units sold Unit proceeds Total proceeds 1.10.2002 100 acquired 1.10.1997 1-15 R115 1.10.2003 100 acquired 1.10.1998 1-25 R125 1.10.2004 100 acquired 1.10.1999 1-20 R120 42 21
120 MV replaced by Proceeds 115 FIFO summary Historical loss 1.10.2002 1.10.2003 1.10.2004 MV on VD 115.00 120.00 120.00 20% of P 23.00 25.00 TABC 112.00 123.00 Pro- Pre E 120.00 Proceeds 115.00 125.00 120.00 Less BC 115.00 123.00 120.00 Capital gain 0 2.00 0 Total gain/loss Gain of R2.00 43 WABC summary 1.10.2002 1.10.2003 1.10.2004 Proceeds 115.00 125.00 120.00 WABC (360 300 100) 120.00 120.00 120.00 (5.00) 5.00 0 No capital gain 44 22
Final comparison SPID FIFO WABC Gain/loss (R3.00) R2.00 0 Best 45 Post VD acquisitions Bought CIS units as follows Date Num CPU 2002 100 R1,10 R1,10 2003 100 R1,20 R1,20 2004 100 R1.30 R1,30 Sold and used SPID SP Proc C/gain 2005 100 (04) R1,40 R140 R10 2006 100 (03) R1,50 R150 R30 2007 100 (02) R1,60 R160 R50 Total capital gain R90 46 23
Post VD acquisitions Sold and used FIFO SP Proc C/gain 2005 100 (02) R1,40 R140 R30 2006 100 (03) R1,50 R150 R30 2007 100 (04) R1,60 R160 R30 Total capital gain R90 Sold and used WABC Proc WABC C/gain 2005 100 R140 120 R20 2006 100 R150 120 R30 2007 100 R160 120 R40 Total capital gain R90 47 PV of Gains SPID FIFO WABC 2005 10 30 20 2006 30 30 30 2007 50 30 40 PV at 6% R82,80 R85,00 R83,90 48 24
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. 50 25
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. 52 26
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. 54 27
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. 56 28
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. 58 29
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. 60 30
Pro rata BC Part Disposals MV of part disposed MV of entire asset x See para 8.27.1 on page 206 SARS Guide Base cost entire asset Tony buys an endowment policy from Ian (the original owner) for an amount of R500 000 on 1 Oct 2005. 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 2006. 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 R522 500 Total base cost Withdrawal Pro rata base cost Capital gain R500 000 R 22 500 522 500 21 531 Proceeds 22 500 R969 22 500 21 531 The remainder of base cost to carry forward is R478 469 (R500 000 R21 531) x 500 000 base cost 62 31
Part Disposals Second withdrawal (1 September 2006) MV of policy before second withdrawal is R522 500 Total base cost Withdrawal Pro rata base cost Capital gain R478 469 R 22 500 22 500 522 500 20 604 Proceeds 22 500 R1 896 20 604 The remainder of base cost to carry forward is R457 865 (R478 469 R20 604) x 478 469 base cost 63 Part Disposals Capital gain withdrawal 1 Capital gain withdrawal 2 Total 969 1 869 2 838 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
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. 66 33
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 R60 000 for deceased in year of death. R12 500 for estate. 68 34
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. 70 35
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. R12 500 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 1 000 000 2 100 000 Holiday home 250 000 350 000 Household furniture 500 000 800 000 Yacht (11m in length) 300 000 200 000 Endowment policy 100 000 150 000 2 nd Hand endowment pol 200 000 300 000 Listed shares 600 000 900 000 See page 373 SARS Guide 72 36
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 1 000 000 2 100 000 1 100 000 (1 000 000) 100 000 Hol home 250 000 350 000 100 000 (100 000) 0 Furniture 500 000 800 000 300 000 (300 000) 0 Yacht 300 000 200 000 (100 000) 100 000 0 Endow 100 000 150 000 50 000 (50 000) 0 2 nd h End 200 000 300 000 100 000 (100 000) 0 L/shares 600 000 900 000 300 000 0 300 000 400 000 74 37
Example continued Sum of capital gains and losses Less: Annual exclusion Aggregate capital gain 400 000 50 000 350 000 Taxable capital gain (0.25 350 000) 87 500 75 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 2006 850 000 960 000 Proceeds 2007 2 300 000 220 000 In order to realise a better price for the yacht Argie Bargie had the navigation equipment upgraded at a cost of R5 000 76 38
continued Result: The taxable capital gain of Richard s estate will be determined as follows: 2006 Proceeds Base cost Cap gain Furniture 850 000 800 000 50 000 Listed shares 960 000 900 000 60 000 77 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 60 000 Less: Annual exclusion Aggregate capital gain 10 000 50 000 Taxable cap gain (0,25 of R50 000) 12 500 78 39
continued 2007 Proceeds Base cost Cap gain Primary residence 2 300 000 2 100 000 200 000 Yacht 220 000 205 000 15 000 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 (R200 000) 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 15 000 12 500 2 500 Taxable cap gain (0,25 of R2 500) 625 80 40
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 110 000 80 000 190 000 8 250 181 750 Tax as per tables on R181 750 R39 525 81 Tax Calculation, Continued Average rate (39 525 181 750 100) 21,74% Step 2: Calculate the tax attracted by the taxable lump sum. 23.7% of R200 000 Step 3: Calculate tax on other income Taxable income as per step 1 Plus: Taxable capital gain Tax on R221 750 (2007) R47 400 181 750 40 000 221 750 R56 612 82 41
Tax Calculation, Continued Tax on lump sum Plus: Tax on other income Total Less: Rebate Total tax payable R47 400 R56 612 104 012 7 200 96 812 83 42