When dealing with capital gains tax one needs to be careful to identify all actual and deemed acquisitions and disposals of assets. Actual acquisitions and disposals are not too challenging to deal with in practice. Deemed acquisitions and disposal are a different kettle of fish! And then the legislation makes provision for transactions that are regarded as acquisitions and disposals at the same time!
In previous articles we examined the structure of CGT legislation and came to the conclusion that the rules are not dissimilar from determining profits or losses on sales concluded by taxpayers.
The challenge facing taxpayers when dealing with CGT is that the legislation makes provision for a number of deemed disposals and acquisitions of assets. The deeming rules are often referred to as stealth provisions operating under the radar screen. If you are not aware of them, they will could come back and bite you at some point in time.
Over and above the deemed acquisition and disposal rules, they are also rules treating certain categories of transactions as acquisitions and disposals of assets at the same time. We shall deal with this category of transactions in this article.
Why do we need rules like this …
Believe it or not, the deemed acquisition and disposal rules are not there to make our lives a misery. They are aimed at addressing situations where existing assets for the first time either become part of the CGT regime or no longer forms part thereof.
Impact on non-residents
The rules apply where a natural person becomes a resident of South Africa or a foreign company becomes a controlled foreign company for the first time.
All assets held by such persons or companies are deemed to be acquired and disposed of on the date that the change in status takes place. This means that no capital gains tax becomes payable immediately as the deemed acquisition and disposal prices are the same.
But wait …
The future impact of this treatment is that the assets held by the persons now have a value for CGT purposes which can be offset against future proceeds if the assets are sold in the future. It therefore protects a taxpayer from having no cost to offset against a future sale of such assets.
Similar rules apply to assets linked to permanent establishments operated by non-residents in South Africa.
Change in purpose with which assets are held
Similar rules as discussed above apply to assets held by South African residents and businesses where the purpose of holding such assets changes from holding the assets on capital account to holding the assets on revenue account and vice versa.
For example if trading stock is held by a taxpayer and the taxpayer subsequently changes the intention with which the trading stock will be held in the future to the holding of a capital asset, the trading stock is deemed to be disposed of on the date that the change in intention is implemented, and is immediately regarded as having been acquired by the taxpayer i.e. creating a value for CGT purposes. The value placed on the trading stock under these circumstances is the value placed on the trading stock for the purposes of income tax.
Similar rules apply where a change of intention with regards to the holding of personal-use assets occurs.
This article demonstrates the checks and balances that have been built into the CGT system to ensure that a value is placed on assets when it enters or exits the CGT regime.
The checks and balances provide an equitable outcome as it ensures that only capital gains attributable to assets after they become part of the CGT tax base are taxed. It therefore represents a safeguard for the taxpayer.
In future articles we shall examine more of the rules that one needs to be aware of when dealing with CGT.
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