LML4804
Assignment 4
Semester 2
2024
, QUESTION 1 (CAPITAL GAINS TAX)
Capital Gains Tax Principles Applicable in the Scenario:
1. Definition of Capital Gains Tax (CGT): CGT in South Africa is a tax on the
profit made from the sale of assets, where the profit is the difference between
the selling price and the base cost of the asset. The base cost typically
includes the purchase price and any costs incurred in enhancing the value of
the asset.
2. Residing in Community of Property: Since Ms. Kru and Lolo are married in
community of property, all assets are jointly owned. This means any capital
gains arising from the sale of their properties will be split equally between Ms.
Kru and Lolo for tax purposes.
3. Severance Package Consideration: The severance package of R5 million is
not subject to CGT; instead, it may be subject to income tax. However, it is
important from a financial standpoint as it may impact the funds available for
reinvestment into new assets or property.
4. Primary Residence Exclusion: According to the Income Tax Act, an
individual is entitled to a primary residence exclusion on capital gains tax for
the first R2 million of the gain on the sale of their primary residence. Ms. Kru’s
house in Blue Halley, assuming it's their primary residence, may benefit from
this exclusion, potentially reducing the taxable capital gain.
5. Improvement Costs: Expenditures such as the R200,000 paid to REX Real
Estate, R30,000 for the taps, and R10,000 for pool repairs can be added to
the base cost of their primary residence, thereby reducing the capital gain
when calculating CGT.
6. Sales of Other Properties: The sale of the holiday house and other assets
(such as vehicles) will also be subject to CGT. However, the primary
residence exclusion does not apply to these assets. Therefore, the entire gain
from these sales would be taxable.
7. Election of Valuation Date: Should Ms. Kru and Lolo have acquired any of
these assets before the introduction of CGT (1 October 2001), they may elect
to use the market value on this date as the base cost instead of the original
acquisition cost.
8. Tax Rates: Individuals are taxed on 40% of their net capital gains, which are
then included in their taxable income and taxed at their marginal tax rate.
9. Filing and Reporting Requirements: CGT must be reported on an
individual’s annual tax return, and specific records, including the details of
asset acquisitions, improvements, and disposals, must be kept for a minimum
of five years.
Assignment 4
Semester 2
2024
, QUESTION 1 (CAPITAL GAINS TAX)
Capital Gains Tax Principles Applicable in the Scenario:
1. Definition of Capital Gains Tax (CGT): CGT in South Africa is a tax on the
profit made from the sale of assets, where the profit is the difference between
the selling price and the base cost of the asset. The base cost typically
includes the purchase price and any costs incurred in enhancing the value of
the asset.
2. Residing in Community of Property: Since Ms. Kru and Lolo are married in
community of property, all assets are jointly owned. This means any capital
gains arising from the sale of their properties will be split equally between Ms.
Kru and Lolo for tax purposes.
3. Severance Package Consideration: The severance package of R5 million is
not subject to CGT; instead, it may be subject to income tax. However, it is
important from a financial standpoint as it may impact the funds available for
reinvestment into new assets or property.
4. Primary Residence Exclusion: According to the Income Tax Act, an
individual is entitled to a primary residence exclusion on capital gains tax for
the first R2 million of the gain on the sale of their primary residence. Ms. Kru’s
house in Blue Halley, assuming it's their primary residence, may benefit from
this exclusion, potentially reducing the taxable capital gain.
5. Improvement Costs: Expenditures such as the R200,000 paid to REX Real
Estate, R30,000 for the taps, and R10,000 for pool repairs can be added to
the base cost of their primary residence, thereby reducing the capital gain
when calculating CGT.
6. Sales of Other Properties: The sale of the holiday house and other assets
(such as vehicles) will also be subject to CGT. However, the primary
residence exclusion does not apply to these assets. Therefore, the entire gain
from these sales would be taxable.
7. Election of Valuation Date: Should Ms. Kru and Lolo have acquired any of
these assets before the introduction of CGT (1 October 2001), they may elect
to use the market value on this date as the base cost instead of the original
acquisition cost.
8. Tax Rates: Individuals are taxed on 40% of their net capital gains, which are
then included in their taxable income and taxed at their marginal tax rate.
9. Filing and Reporting Requirements: CGT must be reported on an
individual’s annual tax return, and specific records, including the details of
asset acquisitions, improvements, and disposals, must be kept for a minimum
of five years.
