Introduction to Capital Gains Tax - The 4 building blocks.
by, 04-Sep-11 at 09:07 PM (46740 Views)
There are four requirements to calculate a capital gain or loss. These four requirements are considered the building blocks of Capital Gains Tax (CGT). There must be an asset, and said asset is disposed of. This puts into motion the requirement to calculate the Capital gain or loss for which the base costs must be determined, as must the proceeds. There is not a separate tax for capital gains per se. A capital gain or loss is calculated according to Schedule Eight of The Income Tax Act, and the amount so calculated is then subject to normal tax.
The definitions section of schedule Eight defines asset as follows:
‘asset’ includes property of whatever nature, whether moveable or immovable, corporeal or incorporeal, excluding any currency, but including any coin made mainly from gold or platinum; and a right or interest of whatever nature to or in such property;
The definition is thus very wide and includes virtually any asset. Capital and non-capital assets are included in the definition, but in terms of calculations of capital gains, non- capital assets already accounted for normal income tax are excluded when calculating capital gains.
The definition excludes currency, however, coins that are mainly made from gold or platinum are included as assets. As an example, a Kruger Rand would be considered an asset but R100-00 note would not be.
Shares, and intellectual property such as trademarks, patents and goodwill also fall under the definition of an asset, as do debtors
Capital Gains Tax is only triggered when there is a disposal or a deemed disposal. Paragraph 11(1) of the Schedule deals with disposals. Paragraph 11(2) sets out specific events that will not be considered a disposal and Paragraph 12, deals with events that will be treated as disposals and acquisitions.
In broad and general terms a disposal occurs when a person held an asset at the beginning of the year and no longer holds it at the end of the year. An exchange of an asset is also effectively a disposal. Paragraph 11(1) lists the events that constitute disposal.
Certain actions or events, although they may practically mean that a person is no longer in possession of an asset they held at the beginning of the year, will be deemed a non – disposal and consequently will not be subject to Capital gains Tax. These are listed in paragraph 11(2).
Deemed disposals occur where the broad definition listed above, that an asset is no longer in a person’s possession, is not relevant. Ten events are listed as deemed disposals and can figuratively be described as a change in status of the person or the actual asset. The deemed disposal may be the stimulus for a Capital gain or loss in the alternative, it might also be necessary to establish a base cost, which would be equal to market value.
For certain deemed disposals in terms of paragraph 12, a person is deemed to have disposed of an asset at market value and is then deemed to have reacquired the same asset at an expenditure which is equal to the same market value. Trading stock becoming capital assets and the converse, results in deemed disposals, which bears both Capital gains Tax and Income Tax implications.
The timing of a disposal or deemed disposal is important in that it because it is taxed at the taxpayers marginal tax rate, the year of assessment in which the disposal occurs bears relevance. Likewise, where there is a Capital Gain prior to a capital loss, in different years of assessment, the taxpayer would not be able to offset the loss against the gain.
Paragraph 13 sets out nine disposal-timing rules and in the event that none of these events is applicable then the timing of the disposal is the date on which ownership of the asset changes. If a spouse who is married in community of property disposes an asset, the disposal is treated as if made in equal shares unless the asset is one excluded from the joint estate.
In order to calculate a capital gain or loss the Base Cost needs to be deducted from the proceeds. To calculate base cost the following factors need to be determined: the Acquisition cost, any improvement costs and any Direct costs in respect of the asset.
The base costs will include any expenditure that is directly related. Includes the cost of acquisition such as transfer duties, advertising costs, moving costs and installation costs. Costs such as legal fees to defend or establish title are also part of base costs. If the asset is wholly and exclusively used for business purposes, and the costs are not normally allowed for Income tax purposes, the costs of maintaining, repairing and protecting, rates and interest on money borrowed directly in order to finance may be calculated as part of the base cost.
Proceeds can also be referred to as the selling price. Proceeds equal the total amount received or accrued in a particular year. The first step is to ascertain if any portion of a receipt or an accrual is revenue or capital in nature. This is necessary because the definition of assets includes assets that are not ordinarily capital assets in nature, particularly by accounting classification systems. Important inclusions in proceeds are amounts by which any debt is written off or reduced, amounts received by or accrued to a lessee related to improvements. When determining the proceeds of an amount to be paid in the future, the face value must be used and not present values.
There are some deeming provisions in relation to proceeds. A donation is treated as a disposal by the donor and as an acquisition by the donee, valued at market value. If the parties agreed to a consideration that is not measurable in money, then the market value is used as the cost.
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