[Question] Capital Gains Tax and shares in a CC.

[PieterPan]

Hi All

Please help.

Scenario:

Adam has 100% shares in a XYZ cc.
He sells 32% to Eave for R2 000 000.

The cc has a R100 share capital.
Retained earnings R nil
Members Loan R 1 299 900
Revaluation Reserve R 5 500 000
Bond R 1 700 000
Fixed Property R 6 000 000
Intangible Assets R 2 500 000

XYZ Balance Sheet

ASSETS
NON CURRENT ASSETS 8 500 000
Tangible assets 6 000 000
Intangible assets - Goodwill 2 500 000

TOTAL ASSETS 8 500 000

MEMBERS FUNDS AND LIABILITIES
MEMBERS' FUNDS 5 500 100
Members' contributions 100
Retained earnings -
Revaluation reserve 5 500 000

MEMBERS' LOAN 1 299 900

NON CURRENT LIABILITIES 1 700 000
TOTAL LIABILITIES AND CAPITAL 8 500 000


What will the Base cost of the 32% shares be?

Thanks

[CLIVE-TRIANGLE]

It's a complex matter.
First question, what is the nature of the businesses income? More to the point, is it passive income like rent, or does it actively trade?
Second question, what is the market value of the assets? Put another way, what are the sale proceeds for the 32% and are the proceeds arms length?
Thirdly, how old is the seller?

[PieterPan]

Thanks Clive

1. The cc own fixed property renting it out to a third party.
2. Market value of the 32% is R 2 000 000
3. The transaction is a arm’s length transaction.
4. The seller is under 50y of age.

Thanks Clive, I truly appreciate.

Regards

[CLIVE-TRIANGLE]

Post deleted, see post below.

[CLIVE-TRIANGLE]

Actually PieterPan, disregard that response and rather first answer the questions:

1. What is the cc's incorporation date?
2. Is he a founding member or did he buy a share?
These questions are critical to your question.

In all assets (and including members interests) the questions to be asked is:

Did he buy it? If so, then what did he pay for it?

If he bought it, then the second question would be, “was it before 2001, or after 2001”

If before 2001 then the 3 methods are available to calculate the base cost. (e.g. 20% of proceeds + TAB + Market value valuation)

If after 2001, then the base cost is what he paid for it.

If he did not buy it and only started it up (before 2001), then the contribution is all that will be available as starting point for a TAB calculation, if a CGT 1 October 2001 Market value was not obtained (NB: valuation to have been done before 30 September 2004. Therefore if they did not have one by that date, then it is a criminal offence to do one now and backdate it). If this yields a higher capital gain than the 20% of proceeds method, then use the 20% of proceeds.

If the CC started after 2001 then the initial contribution is all that will be a base cost. None of the methods will be available and only that which he physically paid e.g. the contribution (e.g. usually R100, or in your case probably R32).

NB: loan accounts are not to form part of any base cost calculation as members loans are a separate asset for CGT purposes.

[Dave A]

Do you want that member loan account to stay there or would you rather be paid out?

I also couldn't help but wonder about that balance sheet:
I question the goodwill value as it seems to come from a revaluation rather than from a sale transaction
And then under liabilities, given there has been a revaluation, is the R1.7 million a bond only, or does it include a deferred tax liability?