When is profit taxed?

[CLIVE-TRIANGLE]

Hi JohnApple

Very interesting question posed and a few observations:
1. In tax matters, the intention of the taxpayer with regard to underlying transactions is often the deciding factor. One man's capital is another man's revenue. Quote often the intention also changes somewhere along the line.
2. SARS will frequently make an assessment based on what they believe the intentions were, and then the onus is on the taxpayer to prove or show that it was something else.
3. As far as a private individual is concerned, profit from sale of assets seldom gives rise to CGT. Well known exceptions indeed are coins of gold or platinum (there may be other metals). Basically the test is if the value of the coin is mainly due to it's base metal, as opposed to it's rarity. Shares and unit trust sales always give rise to CGT unless you trade in them, then it's fully taxed.
4. It is a wry observation that SARS will happily class losses are capital and profit in the same dealings as revenue , so it's pointless asking them.

What do you mean by 'inventory'?

[CLIVE-TRIANGLE]

Just to comment further on the house example given by Dellatjie:

I have a client who, during the period 2004 to 2007 bought in the region of 80 houses. That's not a typo. All were bonded. All were refinanced to provide the funds for the next purchase. All had tenants.

In 2008 the bubble burst and the client offloaded 75% of the properties, because the rentals were now substantially less than the bond repayments.

Many of the offloads, but not all, were at a loss.

We submitted all of the profits on disposal as capital; some were only a few months old.

SARS audited the numbers and condoned the treatment because we were able to show that the intention was to acquire the properties, let tenants indirectly service the loans, with a view ultimately owning the properties as freehold.

The important factor was that they had tenants; in other words the assets were generating income and were not acquired solely for capital appreciation.

Intention is very important. Beware attempting to manipulate events to give the illusion of a different intention; it almost always fails.

[flaker]

i'm not savy with matters of tax, so Clive will you please help me understand the above post.Where the houses were sold at a profit, that profit was taxed as capital gain tax. And in the instance of profit/loss on trading of the same houses (rental income less expenses as interest,maintenance) the profit or loss would be declared as such.
Now what happened to those houses that were sold at a capital loss,that is sold at less than what was originally paid for them?

[CLIVE-TRIANGLE]

i'm not savy with matters of tax, so Clive will you please help me understand the above post.Where the houses were sold at a profit, that profit was taxed as capital gain tax. And in the instance of profit/loss on trading of the same houses (rental income less expenses as interest,maintenance) the profit or loss would be declared as such.
Now what happened to those houses that were sold at a capital loss,that is sold at less than what was originally paid for them?

If an enterprise has assets that are used in the production of income, and some or all of those assets are sold, then those profits on sale are regarded as capital gains or losses. The same applies to private persons. Letting of property is "carrying on a trade" and profits or losses on disposal are similarly treated as capital gains or losses (ignoring for now the method of arriving at the profit or loss and the difference in inclusion rates).

So the number of properties and other semantic considerations are of little consequence; the initial intention supported by the evidence holds sway.

The same person also acquired and sold properties in a speculative manner; those disposals were treated as revenue and not capital because there never was any intention that those properties would generate rentals; the bit of rentals generated were incidental to the intention to acquire the properties cheaply and sell them at a substantial profit.

The losses on disposal of some properties were merely set off against those that realised profits, to arrive at a net capital gain which was aggregated with the loss realised by the rental activity.

JohnApple asked if there was a hard and fast rule or if each is treated on it's merits (my interpretation) and the answer is that there is no hard and fast rule.