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CGT – On what do I base the cost of an asset?

CGT – On what do I base the cost of an asset?

September 30, 2021
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Everybody would agree that it is too late to start enquiring what the cost of an asset had been after the disposal thereof. In practice this dilemma however often faces taxpayers.

This article introduces the concept of base cost of an asset for capital gains tax (CGT) purposes to avoid an “I should have” lamentation.

Introduction

The concept of the base cost of an asset is critical to determine the amount of capital gain or loss to be declared on the disposal of an asset.

In practice, especially in the case of individuals, establishing the base cost of an asset is often an issue that is only considered once an asset has been disposed of and CGT payable stares the taxpayer in the face.

This article deals with the basic rules to determine the base cost of an asset. In the next article we shall deal with more complicated scenarios.

The objective

The objective of the CGT legislation is to determine the real cost of an asset as a basis to determine the capital gain or loss on the disposal of such asset.

In many instances the cost of an asset for accounting purposes will closely approximate or be identical to the cost for CGT purposes. There are however certain adjustments that must be made that taxpayer must be aware of.

The simple reason why a taxpayer would want to identify all deductible costs is a simple equation: the more costs that can be identified the lower the profit on which tax must be paid.

Do you need any more motivation?

THE BASIC RULES

Cost of acquiring an asset

As a rule of thumb one can safely say that the base cost of an asset is all the costs incurred to bring the asset to its current location and condition.

The above includes amongst others the actual cost of the asset, the remuneration of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal advisor for services rendered, transfer duty paid, stamp duty paid, the cost of moving the asset, etc.

The base cost may also include interest charges subject to specific conditions.

And there is more …

Cost of disposing of an asset

A taxpayer may also add to the base cost of an asset, costs directly incurred in respect of the disposal of such asset. Such costs may include the cost of agents, advertising of the property, valuation fees, other professional fees, etc.

All goods news so far!

What is excluded?

Unfortunately there are instances where costs incurred may not be added to the base cost of an asset.

As a general rule costs that are deductible for normal income tax purposes cannot also be added to the base cost of an asset for CGT purposes. This is however in a sense a blessing in disguise. A deduction for income tax purposes is always preferable to an amount being added to the base cost of a CGT asset.

Conclusion

This article provides a birds eye view of the concept of the base cost of an asset for CGT purposes. While it in no way deals comprehensively with the issue, it should give the reader a fair idea of where the concept fits into the ambit of CGT.

What is abundantly clear though, is that accurate determination of the base cost of an asset is closely linked to proper and accurate record keeping. This seems to be a recurring theme.

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