The implementation date for Capital Gains Tax (CGT) was 1 October 2001 (the effective date) and only capital gains arising after the effective date will be subject to CGT. Capital gains are determined and then included in the taxable income of a tax payer. CGT is regarded as a tax on income and is therefore incorporated as part of the Income Tax Act.

Who is liable for CGT?

1. Residents
   All South African residents are liable for CGT on the disposable of any asset whether the disposal is made in the Republic or beyond its borders.
   
   
2. Non-residents
   A non-resident will be subject to CGT on the disposable of any immovable property or any interest or right in immovable property situated in the Republic, and any asset of a permanent establishment through which a trade is carried on in the Republic.
   

What is a capital gain?

A capital gain is the proceeds (or deemed proceeds) from the disposal (or deemed disposal) of an asset less the base cost. The proceeds from the disposal will generally be the price at which the asset is sold. In certain cases, when it is not possible to determine the selling price of the asset (for example in the case of death, donations, disposal of an asset at less than market value, emigration or immigrations), the market value of the asset will be the price that could have been obtained upon the sale of the asset between a willing buyer and a willing seller dealing at arm?s length in the open market. The base cost of the asset is deducted from the proceeds to arrive at the capital gain. The capital gain is then multiplied by the inclusion rate to determine the taxable gain.

Assets

The term ?asset? is defined as widely as possible and basically includes any property of any nature and any interest in such property. It will therefore include the following:

Shares; unit trusts; land, property and rights to property; large boats (more than 10m) and aircraft (more than 450kg); plant and machinery; mineral rights; coins made mainly from gold or platinum, e.g. Kruger rands and all other assets except those specifically excluded.

The definition of ?asset? specifically excludes any currency and the distribution of money can therefore never be subject to CGT. CGT applies to all assets disposed of after 1 October 2001 whether or not the asset was acquired before, on, or after that date.

Disposals

A disposal for capital gains tax purposes is regarded as an event, act, forebearance or operation of law which results in the creation, variation, transfer or extinction of an asset. It is a very wide definition that covers almost every situation where there is a change of ownership of
an asset.

The following events, amongst others, would fall within the definition of disposal:

A sale, donation or cession; expiry or abandonment of an asset; the scrapping, loss or destruction of an asset; the vesting of an interest in an asset of a trust in the hands of a beneficiary; the distribution of an asset by a company to a shareholder; the granting, renewal, extinction or exercise of an option; the decrease in value of a person?s interest in a company, trust or partnership as a result of a value shifting arrangement.

In addition to the list above, there are a number of events that are to be treated as disposals for the purposes of CGT (i.e. deemed disposals). The legislation deems that the asset(s) are disposed of a day before the event and the reacquired immediately at market value. These events are the following:

• When a person ceases to be a resident, all that person?s assets are deemed to be disposed of except immovable property or rights in immovable property situated in the Republic, and assets of a permanent establishment through which that person carries on a trade in the Republic during the year of assessment.
  
  
• The assets of a person who becomes a resident of the Republic during the year of the assessment, except immovable property or rights in immovable property situated in the Republic, and assets of a permanent establishment through which that person carries on a trade in the Republic during the year of assessment.
  
  
• The assets of a person who is not a resident, which become an asset of that person?s permanent establishment in the Republic other than by way of acquisition, and are withdrawn from the permanent establishment for personal or other use.
  
  
• As asset of a person that is not held as trading stock, which becomes trading stock.
  
  
• A personal use asset held by a natural person, which ceases to be a personal use asset of that person without being disposed of.
  
  
• An asset which is not held as a personal use asset, which commences to be held as that person?s personal use asset.
  
  
• When a person dies, a that person?s assets are deemed to be disposed of the day before the person dies, at market value.

In determining when the capital gain or loss accrues to a person or must be taken into account, the timing of the disposal becomes important. In most cases the disposal will take place on transfer of ownership of the asset.

Exclusions from capital gains tax
Amounts excluded from capital gains tax

The following amounts are excluded from CGT:

• Any amount that must included in the taxable income of the taxpayer
• Any amount for which the taxpayer must account as output tax under the VAT Act.
  
• Any amount that has been repaid or has become repayable to the person to whom the asset was disposed of Annual exclusion
  

The first R12 500 of a natural person and a special trust?s capital gains are excluded in each year of assessment. Where a person dies during a year of assessment, such person?s annual exclusion for that year of assessment is R50 000.

Primary Residence Exclusion

The general principle is that capital gains will be taxable on the disposable of primary residences, with the first R1 500 000 of a capital gain or loss being disregarded. Capital gains in excess of R1 500 000 will, therefore, be subject CGT.

The size of the residential property will also be subject to certain exclusions. A primary residence includes the land upon which it is actually situated and may include land adjacent to it that is used mainly for domestic purposes. The total of all the land must not exceed two hectares in order to fall out of the CGT net. If the size of the property exceeds two hectares, a reasonable apportionment would have to be made. If the property is not mainly used for domestic purposes, that portion will not qualify for the exclusion.

Absence from primary residence for certain periods where a natural person or a special trust disposes of an interest in a primary residence, but was not ordinarily resident in such residence for the whole period prior to the disposal date, the exclusion will be determined with reference to the period(s) during which the person, beneficiary or spouse was actually ordinarily resident. Even if a person, beneficiary or spouse was not ordinarily resident in the residence for a maximum period of 2 years, he or she will be deemed to be a resident, if the absence was due to the following reasons :

• The residence was being put up for sale and vacated with the intention to acquire a new
• primary residence.
  
• The residence was in the process of being built on land acquired for purposes of building a primary residence.
  
• The residence was accidentally rendered uninhabitable, for example, as a result of flood
• or fire.
  
• The death of that person.
  

Personal Use Assets

Personal use assets are also not subject to CGT. Examples of personal use assets are cars, furniture and garden appliances. The following are not regarded as personal use assets:

A coin made mainly from gold or platinum e.g. Krugerrands; immovable property; an aircraft exceeding 450kg; a boat exceeding 10m in length; all financial instruments; a fiduciary, usufructary or other like interest, the value of which decreases over time and a right or interest in any of the aforementioned assets.

Lump sums from your pensions, provident or retirement annuity funds
Lump sums from local retirement funds or from foreign funds of a similar nature are not subject to CGT.

The proceeds of a long-term insurance policy

Insurance polices are not subject to CGT in the hands of the owner provided that such owner is the owner of first instance or his/her spouse, dependent or beneficiary.

Prizes from a South African source

Any gain made on the exchange of foreign currency into rands A gain of up to R500 000 on the sale of assets of small business on retirement

?Small business? means a business of which the market value of all its assets, as at the date of disposal of the asset or interest does not exceed R5 000 000.

The person must have, at the time of disposal, held for his / her own benefit that active business asset, interest in the partnership, or interest in the company for a continuous period of at least 5 years prior to disposal and must have been substantially involved in the operations of that small business during that period. The person must have attained the age of 55 years or the disposal must be in consequence of ill-health, other infirmity, superannuation or death.

The sum of the amounts to be disregarded may not exceed R500 000 during that person?s lifetime.

Determing the base cost

Capital gains or losses are the difference between the base cost of the asset and the sum received on its sale or disposal. The base cost is calculated by adding up the following expenses:

• Acquisition costs, costs associated with the acquisition and disposal of the asset (for example legal fees, agent?s commission, stamp duty, advertising costs, broker?s fees and transfer duty); VAT; improvement costs and any legal costs incurred (for example, the legal costs incurred in defending a right to an asset owned by the taxpayer).
  
• Business assets: All current expenses incurred in respect of business assets can be included in the base cost.
  
• Shares and unit trusts: Up to one third of any interest incurred on a loan taken to purchase shares or unit trusts will form part of the base cost.
  

Assets acquired after 1 October 2001

As mentioned earlier, CGT only applies to gains made after 1 October 2001. The base cost of an asset purchased after that date is simply the purchase price plus any allowable expenses (as discussed above).

Assets acquired before 1 October 2001

Before the base cost can be determined, the valuation date value (value of the asset as at 1 October 2001) has to be determined. Once this value has been determined, any allowable expenses incurred after 1 October 2001 must be added to determine the base cost.

Market Value

The market value of the asset at 1 October 2001 can be used as the valuation date value. Taxpayers have until 30 September 2003 to obtain the market value of the asset. Even though the valuation may occur subsequent to 1 October 2001, the valuation must be the value as at 1 October 2001.

For shares, bonds and other securities traded on the open market, the market value will be calculated by taking the average closing price of the asset for the five trading days before 1 October 2001.

Time apportionment method

This method involves looking at the total capital gain made over the period during which the asset was owned and then determining the gain made after 1 October 2001.

The 20% rule

In terms of this rule 20% of the proceeds received by the seller will be deemed to be the base cost in the event that an asset held before 1 October 2001 is sold thereafter. Allowable expenditure incurred after 1 October 2001 must be deducted from the proceeds before the 20% rule is calculated.

A taxpayer need only inform the Commissioner of the South African Revenue Service of the option chosen once the asset is
disposed of.

However, where a taxpayer opts for the market value as the valuation method, proof of the valuation must be submitted with the first tax return submitted after 30 September 2003 in the following instances :

Type of asset Applies Where market value exceeds Intangible assets Unlisted shares All other assets Per asset All shares held by the shareholder in the company Per asset R1 million R10 million

Roll-Overs

The CGT legislation provides for the roll-over of certain capital gains. In such cases a CGT liability does not arise upon disposal or transfer of ownership, but is rather deferred until a subsequent CGT event. In all cases the ?pre-exchange? base cost is rolled over.

Involuntary disposals ? in the case of expropriation, loss or destruction of an asset

If an amount equal to the proceeds has or will be used in replacing an asset; a contract is entered into for the replacement, reconstruction or rectification within one year; and the replacement asset has or will be brought into use within 3 years of the disposal of that asset, the roll-over maybe applied. In the event that this time frame is not adhered to, the gain will be taxed at the applicable rate for the year in which the asset was originally disposed of, plus interest at the prescribed rate.

Reinvestments in replacement assets where capital gains arise on the disposal of assets that qualify for capital allowances or deductions.This is the case where an asset utilised in the production of income is disposed of and the proceeds are reinvested in a similar asset provided that the base cost is no less than that of the asset disposed of.

Where the asset disposed of is a depreciable asset, the roll-over only applies to the capital gain or loss and not to any recoupment required in terms of normal income tax provisions.

Transfers of Assets between spouses

The base cost of an asset is transferred to that person?s spouse where the asset is transferred to that person?s spouse during that person?s lifetime. The base cost will also be rolled over to that person?s spouse as a result of that person?s death, or as a consequence of a divorce order / agreement of division of assets that has been made an order of court.

Attribution of Capital Gains

In certain instances capital gains will be attributed to entities other than those that have disposed of the assets. The following are examples of where capital gains will be attributed to entities other than those that made the disposal:

• Attribution of capital gains to spouses
• Attribution of capital gains to parents of minor children
• Attribution of capital gains subject to conditional vesting
• Attribution of capital gains subject to revocable vesting
• Attribution of capital vesting in a person who is not a resident
• Attribution of income, as well as capital gain.
  

(These CGT attribution rules are similar to the income tax provisions contained in section 7 of the Income Tax Act). Rate at which the capital gains is included in taxable income (inclusion rate)

Once a net capital gain for the year of assessment is determined, such amount is multiplied by the inclusion rate to determine the individual or entity?s taxable gain.

Inclusion rate x statutory tax rate = effective rate.

Aggregate capital gain or aggregate capital loss

A capital gain or loss is first determined separately for each asset disposed of by a taxpayer during a year of assessment.

In determining a person?s aggregate capital gain or loss, two steps need to be followed :

Determination of a net capital gain or assessed capital loss

After determining a person?s aggregate capital gain or aggregate capital loss, the person?s assessed capital loss for the previous year of assessment, if any, must be deducted from the aggregate capital gain or added to the aggregate capital loss to determine the net capital gain or assessed capital loss for the current year of assessment. There is no limit as to the length of time that a capital loss can be carried forward.

Capital losses

Capital gains must be included in taxable income, but capital losses can only be offset against capital gains. It is not possible to offset capital losses against income.

The limitation of capital losses

Although capital losses may generally be offset against gains, capital losses made on the disposal of certain assets must be disregarded. These include losses made on the disposal of personal use aircraft, boats as well as certain intangible assets acquired prior to valuation date from connected persons.

The capital loss on the sale of shares will be disregarded if :

• The share has not been held for more than 2 years before resale; and
• The shares must have carried the right to participate in one or more dividends that are extraordinary in the aggregate. Dividends are extraordinary to the extent those dividends exceed 15% of the proceeds received or accrued from the disposal of the share.
  

The limitation above will exclude distributions from unit trusts, foreign dividends and the dividends between group companies.

Record-keeping

It is the taxpayer?s responsibility to supply proof of the base cost of an asset. As a minimum, the following records should be kept :

• The date the asset is acquired
• The price paid
• Any money spend on the purchase (transfer fees)
• Any money spent on improving the asset
• The date the asset was

Disposed of

• The profit or loss made on

The disposal

When an asset is disposed of, the records pertaining to the asset must be kept for a least four years after the Commissioner acknowledges receipt of the disposal.