Capital gains tax – how big is the basket?

In this CGT article we deal with the broad framework of the CGT legislation. We specifically deal with what goes into the CGT basket to determine any potential CGT inclusion in taxable income.

Introduction

CGT can almost be viewed as a tax separate and distinct from normal income tax; an appendix if you like. The potential inclusion of CGT amounts in taxable income is separately computed based on CGT rules and legislation and only then incorporated into a taxpayer’s tax computation.

In this article we shall explore the ambit of the parallel tax called CGT, in other words, what goes into the CGT basket.

The broad structure

The structure of the CGT legislation (contained in the Eighth Schedule to the Income Tax Act) is not dissimilar to the manner in which normal taxable income is computed for income tax purposes.

Total capital gains for a year of assessment (referred to in the Eighth Schedule as “aggregate capital gain”) and capital losses (referred to in the Eighth Schedule as “aggregate capital loss”) are separately identified and quantified before set-off is done to compute the net capital profit or loss (referred to in the Eighth Schedule as “net capital gain” and “assessed capital loss”). This is very similar to the concept of income reduced by expenditure and losses for income tax purposes.

The assessed capital loss is the equivalent of an assessed loss for income tax purposes and can be carried forward to be offset against future capital profits realised. Capital losses cannot be offset against revenue income.

Once the net capital gain has been quantified, general exclusions are applied (primarily R40 000 per annum for natural persons and certain categories of trusts) after which the remaining amount is included in a taxpayer’s taxable income at the inclusion rate. The inclusion rate is currently 40% for natural persons and 80% for most other taxable entities.

For the technically minded, section 21A of the Income Tax Act is the link between the Eighth Schedule and the Income Tax Act to facilitate the inclusion of the taxable portion of a capital gain in a person’s taxable income.

What is included in the basket?

The good news is that only disposals of assets are included in the basket.

The bad news is that for every simple rule in tax legislation there are a mountain of exceptions and special rules. CGT is no exception.

What are disposals for CGT purposes?

Disposal of assets include the sale, donation, expropriation, conversion, grant, cession, exchange or other alienation or transfer of ownership of an asset.

If the above is not enough, there are also various other categories of incidences where disposals of assets are regarded as having taken place. Essentially it is instances where the previous owner of an asset loses control over that asset (for example, where an asset is destroyed) or where the value of the asset is diminished (for example where an asset is distributed to a shareholder of the company).

To complicate things, there are also various instances where an arrangement is not regarded as a disposal. An example of an exclusion is where goods are transferred to a 3rd person as security for a debt. There are various other instances as well.

In practice each transaction should be carefully considered to determine whether it constitutes a disposal for CGT purposes, and if so, whether any of the exclusions apply to the transaction.

Disposal events

To finally drive you over the edge, there are various instances or events that are regarded to be a disposal for CGT purposes.

One instance that impacts all taxpayers is that assets falling under the CGT regime were deemed to have been supplied by taxpayers on the date that CGT became effective. The disposal was deemed to have been made at the market value of the goods at that time.

The legislation also deemed the same goods to have been acquired on the same date for the same value resulting in no actual CGT liability for the person concerned.

The above was the mechanism by which a value was placed on goods held by taxpayers on the date of implementing CGT (i.e. establishing the base cost of such goods). More about this in future articles.

There are various other instances of deemed disposals. We shall deal with that when we deal with specific transactions in future articles.

Conclusion

In this article we attempted to set the scene or framework within which CGT operates. In future articles we shall delve a little deeper to demonstrate some of these principles more fully.