LU 6 - CAPITAL GAINS TAX
WHAT IS CAPITAL GAINS TAX? (APPLICABLE 1 OCT 2001)
S26A of the Income Tax Act provides that the taxable income of a person must include the taxable capital gain of that person for
the year of assessment determined in terms of the Eighth Schedule to the Act. This Eighth Schedule provides the rules for
calculating capital gains and losses.
The process for arriving at the taxable capital gain or assessed capital loss for the year is as follows:
Therefore, as can be seen from the above steps, a capital loss cannot be set off against taxable income but must be carried
forward to the next year of assessment to be set off against future capital gains.
A South African resident is taxed on the capital gains arising from the disposal of his worldwide assets. Non-residents are only
subject to capital gains tax on the disposal of the following assets:
Immovable property situated in South Africa (including any interest in immovable property), and
Assets of a South African permanent establishment of the non-resident.
A permanent establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on
and specifically includes a place of management, a branch, an office, a factory or a workshop.
,INCLUSION RATES
Only a portion of the net capital gain is included in taxable income. The inclusion rate is dependent on the type of taxpayer. The
below table summarises the inclusion rates and resulting effective capital gains tax rates for the year ended 28 February 2018
as follows:
SEE EXAMPLE 6.1
ANNUAL EXCLUSIONS
Natural persons and special trusts are entitled to an annual exclusion and an exclusion in the year of death which reduces the
net capital loss or the net capital gain as follows:
SEE EXAMPLE 6.2
DEFINITIONS
ASSET
Property of whatever nature.
Including tangible and intangible assets.
Excluding currency but including any coin made from gold or platinum.
Including rights or interests of whatever nature to or in such property.
Since currency is excluded, there will be no CGT payable on the disposal of cash (there may however be donations tax
implications).
DISPOSAL
Paragraph 11 defines disposal as any event, act, forbearance or operation of law that results in the creation, variation, transfer
or extinction of an asset and has a number of specific inclusions. Some of these inclusions are as follows:
The sale, donation, expropriation, conversion, grant, cession or exchange of an asset.
Any alienation or transfer of ownership of an asset.
The forfeiture, termination, redemption, cancellation, surrender, discharge, relinquishment, release, waiver,
renunciation, expiry or abandonment of an asset.
The scrapping, loss or destruction of an asset.
The distribution of an asset by a company to a shareholder.
The decrease in value of a person’s interest in a company, trust or partnership as a result of a value-shifting
arrangement.
The resting of an interest in an asset of a trust in a beneficiary.
, As can be seen, many events will fall within this broad definition of disposal. A general rule that can be applied is: if a person
who was in possession of an asset during the year no longer owns this asset at year-end a disposal has taken place.
Paragraph 11(2) narrows the definition of disposal slightly by excluding some of the following events:
The transfer of an asset as security for a debt and the transfer of this asset back to the debtor.
The issue or cancellation by a company of its own shares.
The distribution of an asset in a trust to a beneficiary where the beneficiary already has a vested interest in that asset.
The issue of any bond, debenture, note or other borrowing of money from another person.
DEEMED DISPOSALS
Certain deemed disposals will also trigger a capital gains tax event. These deemed disposals include the following:
CHANGE IN RESIDENT STATUS
When a person ceases to be a resident of South Africa or becomes a resident of South Africa, he will be deemed to have
disposed of certain assets at the date (or the day before the date) that this change in residency takes place.
A PERSON CEASES TO BE A RESIDENT – PARAGRAPH 12(2)(A)
Where a person ceases to be a South African resident for tax purposes he is deemed to have disposed of all his assets at market
value on the date that he ceased to be a resident, with the exception of the following assets:
Immovable property situated in South Africa.
Assets which form part of a permanent establishment of South Africa.
Certain equity instruments contemplated in S8B and S8C.
A PERSON BECOMES A RESIDENT OF SOUTH AFRICA – PARAGRAPH 12(4)
Where a non-resident becomes a resident of South Africa for taxpaying purposes, he will be deemed to have disposed of all of
his worldwide assets on the day before the date on which he became a resident, and immediately re-acquired these assets at
market value.
This means that when this person later disposes of any of these assets the base cost to be used in his capital gains calculation
will be the market value of the asset on the date he became a resident. Immovable property situated in South Africa and assets
which form part of a permanent establishment of the person in South Africa are excluded from this deemed disposal.
DO QUESTION 6.1
ASSETS OF A NON-RESIDENT’S PERMANENT ESTABLISHMENT – PARAGRAPH 12(2)(B)
Where an asset:
i. becomes part of a non-resident’s permanent establishment in South Africa other than by way of acquisition; or
ii. is no longer a part of a non-resident’s permanent establishment in South Africa other than by way of disposal
Then this asset will be deemed to have been disposed of at market value and re-acquired at market value.
There will be no capital gains tax payable in (i), because assets of a non-resident which do not form part of a permanent
establishment in South Africa are not subject to CGT. What this section does is set the base cost of the asset to the permanent
establishment.
In (ii), capital gains tax will be payable. The capital gain or loss is determined by comparing the market value (deemed proceeds)
to the base cost of the asset.
WHAT IS CAPITAL GAINS TAX? (APPLICABLE 1 OCT 2001)
S26A of the Income Tax Act provides that the taxable income of a person must include the taxable capital gain of that person for
the year of assessment determined in terms of the Eighth Schedule to the Act. This Eighth Schedule provides the rules for
calculating capital gains and losses.
The process for arriving at the taxable capital gain or assessed capital loss for the year is as follows:
Therefore, as can be seen from the above steps, a capital loss cannot be set off against taxable income but must be carried
forward to the next year of assessment to be set off against future capital gains.
A South African resident is taxed on the capital gains arising from the disposal of his worldwide assets. Non-residents are only
subject to capital gains tax on the disposal of the following assets:
Immovable property situated in South Africa (including any interest in immovable property), and
Assets of a South African permanent establishment of the non-resident.
A permanent establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on
and specifically includes a place of management, a branch, an office, a factory or a workshop.
,INCLUSION RATES
Only a portion of the net capital gain is included in taxable income. The inclusion rate is dependent on the type of taxpayer. The
below table summarises the inclusion rates and resulting effective capital gains tax rates for the year ended 28 February 2018
as follows:
SEE EXAMPLE 6.1
ANNUAL EXCLUSIONS
Natural persons and special trusts are entitled to an annual exclusion and an exclusion in the year of death which reduces the
net capital loss or the net capital gain as follows:
SEE EXAMPLE 6.2
DEFINITIONS
ASSET
Property of whatever nature.
Including tangible and intangible assets.
Excluding currency but including any coin made from gold or platinum.
Including rights or interests of whatever nature to or in such property.
Since currency is excluded, there will be no CGT payable on the disposal of cash (there may however be donations tax
implications).
DISPOSAL
Paragraph 11 defines disposal as any event, act, forbearance or operation of law that results in the creation, variation, transfer
or extinction of an asset and has a number of specific inclusions. Some of these inclusions are as follows:
The sale, donation, expropriation, conversion, grant, cession or exchange of an asset.
Any alienation or transfer of ownership of an asset.
The forfeiture, termination, redemption, cancellation, surrender, discharge, relinquishment, release, waiver,
renunciation, expiry or abandonment of an asset.
The scrapping, loss or destruction of an asset.
The distribution of an asset by a company to a shareholder.
The decrease in value of a person’s interest in a company, trust or partnership as a result of a value-shifting
arrangement.
The resting of an interest in an asset of a trust in a beneficiary.
, As can be seen, many events will fall within this broad definition of disposal. A general rule that can be applied is: if a person
who was in possession of an asset during the year no longer owns this asset at year-end a disposal has taken place.
Paragraph 11(2) narrows the definition of disposal slightly by excluding some of the following events:
The transfer of an asset as security for a debt and the transfer of this asset back to the debtor.
The issue or cancellation by a company of its own shares.
The distribution of an asset in a trust to a beneficiary where the beneficiary already has a vested interest in that asset.
The issue of any bond, debenture, note or other borrowing of money from another person.
DEEMED DISPOSALS
Certain deemed disposals will also trigger a capital gains tax event. These deemed disposals include the following:
CHANGE IN RESIDENT STATUS
When a person ceases to be a resident of South Africa or becomes a resident of South Africa, he will be deemed to have
disposed of certain assets at the date (or the day before the date) that this change in residency takes place.
A PERSON CEASES TO BE A RESIDENT – PARAGRAPH 12(2)(A)
Where a person ceases to be a South African resident for tax purposes he is deemed to have disposed of all his assets at market
value on the date that he ceased to be a resident, with the exception of the following assets:
Immovable property situated in South Africa.
Assets which form part of a permanent establishment of South Africa.
Certain equity instruments contemplated in S8B and S8C.
A PERSON BECOMES A RESIDENT OF SOUTH AFRICA – PARAGRAPH 12(4)
Where a non-resident becomes a resident of South Africa for taxpaying purposes, he will be deemed to have disposed of all of
his worldwide assets on the day before the date on which he became a resident, and immediately re-acquired these assets at
market value.
This means that when this person later disposes of any of these assets the base cost to be used in his capital gains calculation
will be the market value of the asset on the date he became a resident. Immovable property situated in South Africa and assets
which form part of a permanent establishment of the person in South Africa are excluded from this deemed disposal.
DO QUESTION 6.1
ASSETS OF A NON-RESIDENT’S PERMANENT ESTABLISHMENT – PARAGRAPH 12(2)(B)
Where an asset:
i. becomes part of a non-resident’s permanent establishment in South Africa other than by way of acquisition; or
ii. is no longer a part of a non-resident’s permanent establishment in South Africa other than by way of disposal
Then this asset will be deemed to have been disposed of at market value and re-acquired at market value.
There will be no capital gains tax payable in (i), because assets of a non-resident which do not form part of a permanent
establishment in South Africa are not subject to CGT. What this section does is set the base cost of the asset to the permanent
establishment.
In (ii), capital gains tax will be payable. The capital gain or loss is determined by comparing the market value (deemed proceeds)
to the base cost of the asset.
