NB notes
Capital Gains Tax
General Background
Capital Gains Tax
• Tax on wealth increase
• Only taxable gains are included in the tax framework, not capital losses (can only
be set off against capital gain)
• Still forms part of income tax- not a separate tax
Why capital gains are subject to tax
International benchmarking
• Align tax system with SA trade partners
Horizontal equity
• Individuals in similar economic circumstances should bear a similar tax burden, irrespective of the form the increase in
their economic power takes
• Should thus be taxed when e.g. income is earned from capital appreciation from shares, as one would be taxed on
interest had the investment been in a fixed deposit
Vertical equity
• Taxpayers with greater ability to pay taxes should bear a greater burden of taxation
• Contributes to the progressivity of the income tax system, as the greatest proportion comes from the wealthiest
individuals
Shift from income to capital
• When capital gains are not taxed, taxpayers have an incentive to re-characterize income as capital- thus rather invest
in capital earning investments than income earning investments
• This erodes the tax base and results in an artificial allocation of resources
Economic efficiency
• With no CGT, investors would rather invest in assets, which does not create a benefit for the broader economy, e.g. by
reducing unemployment.
Tax base broadening
• The introduction of CGT will enable the tax base to be broadened thus facilitating lower overall tax rates
Persons liable for CGT (par 2)
• Resident: all world-wide assets ((2)(a))- (usually first look at a DTA, but will usually be told to ignore DTA in question)
• Non-resident: Immovable property in SA, and disposals of SA permanent establishment (2(b))
How are capital gains taxed
Income Tax Act: Section 26A
• There shall be included in the taxable income of a person for a year of assessment the taxable capital gain of that person
for that year of assessment, as determined in terms of the Eighth Schedule.
• Established on 1 October 2001- 8th schedule only applies to capital gains made after this date
Inclusion Rates:
• 2017 -2019: 40% (Individuals) and 80% (Companies)- p 10
Determination of capital in nature
• Must refer to case law, such as with gross income definition
• Visser- fruit v tree principle
• Must look at facts and circumstances, as well as intention of seller
, NB notes
• Act takes precedence over the 8th schedule, thus what is included in GI cannot be taxed with CGT, and any amount
deductible under the act, cannot be included in the base cost
• Thus, must exclude any recoupments from proceeds, and exclude any deductions from base cost
General definitions- CGT Framework
* Very important to follow the order of the CGT framework
Capital gains and losses (par 3+5)
• Where proceeds exceed base cost, a capital gain is calculated
• Where base cost exceeds proceeds, a capital loss is calculated
• Sum of capital gains and losses- need to look at each asset separately
Annual exclusion (par 5)
• Annual exclusion of R 40 000 for individuals and special trusts- not for companies or trusts (1)
• R 300 000 in year of death (2)
• Special trust- created solely for persons with a disability (s 1)
• Decreases total net capital gains and losses (thus, even if there is a loss, the loss will get less)
• Cannot take a gain and make it a loss, and the unused portion cannot be carried forward to another year
Aggregate capital gain and loss (par 6+7)
• Sum of capital gains and losses, less the annual exclusions (before the carry forward of assessed losses from previous
years)
• Also mentions “gains required to be taken into account”- refers to roll-overs that was not taxed in earlier years of
assessment
• Important to remember that a loss also gets reduced by the annual exclusion
Net capital gain or assessed capital loss (par 8+9)
• Aggregate capital gain less the assesses capital loss from the previous year
• Assessed capital loss is either created by capital gain that is exceeded by capital loss from precious year (9(a)), or when
there is an aggregate capital loss, and an assessed capital loss of the previous year (9(b)), or when there was no
aggregate capital loss or gain in the current year, but an assessed capital loss from the previous year (9(c))
• Assessed capital loss cannot be deducted- carried forward to the next year, regardless of whether the person is carrying
on a trade
Taxable capital gain (par 10)
• “Taxable capital gain” is referred to in s 26A (thus no
mention of loss in Act, and thus not included)
• 40% for individuals; 80% for companies, company
policyholder funds, and risk policy funds- of net capital
gain
Asset (par 1)
1. Property of whatever nature (movable of immovable) – (very wide definition, mostly all inclusive)
2. This includes tangible and intangible assets (corporeal and incorporeal)
3. Including any coin made mainly from gold or platinum
4. Including rights or interests of whatever nature in such property.
* Currency (money in bank) is excluded from the definition (but cryptocurrency is not excluded)
* When dealing with non-capital assets, will still meet the definition of an asset, but the CGT implications will be 0, as
the amounts would already have been taken into account for normal tax- as the principle Act takes preference
Disposal
• General principle- a person held an asset at the beginning of a year, but now no longer holds it
Capital Gains Tax
General Background
Capital Gains Tax
• Tax on wealth increase
• Only taxable gains are included in the tax framework, not capital losses (can only
be set off against capital gain)
• Still forms part of income tax- not a separate tax
Why capital gains are subject to tax
International benchmarking
• Align tax system with SA trade partners
Horizontal equity
• Individuals in similar economic circumstances should bear a similar tax burden, irrespective of the form the increase in
their economic power takes
• Should thus be taxed when e.g. income is earned from capital appreciation from shares, as one would be taxed on
interest had the investment been in a fixed deposit
Vertical equity
• Taxpayers with greater ability to pay taxes should bear a greater burden of taxation
• Contributes to the progressivity of the income tax system, as the greatest proportion comes from the wealthiest
individuals
Shift from income to capital
• When capital gains are not taxed, taxpayers have an incentive to re-characterize income as capital- thus rather invest
in capital earning investments than income earning investments
• This erodes the tax base and results in an artificial allocation of resources
Economic efficiency
• With no CGT, investors would rather invest in assets, which does not create a benefit for the broader economy, e.g. by
reducing unemployment.
Tax base broadening
• The introduction of CGT will enable the tax base to be broadened thus facilitating lower overall tax rates
Persons liable for CGT (par 2)
• Resident: all world-wide assets ((2)(a))- (usually first look at a DTA, but will usually be told to ignore DTA in question)
• Non-resident: Immovable property in SA, and disposals of SA permanent establishment (2(b))
How are capital gains taxed
Income Tax Act: Section 26A
• There shall be included in the taxable income of a person for a year of assessment the taxable capital gain of that person
for that year of assessment, as determined in terms of the Eighth Schedule.
• Established on 1 October 2001- 8th schedule only applies to capital gains made after this date
Inclusion Rates:
• 2017 -2019: 40% (Individuals) and 80% (Companies)- p 10
Determination of capital in nature
• Must refer to case law, such as with gross income definition
• Visser- fruit v tree principle
• Must look at facts and circumstances, as well as intention of seller
, NB notes
• Act takes precedence over the 8th schedule, thus what is included in GI cannot be taxed with CGT, and any amount
deductible under the act, cannot be included in the base cost
• Thus, must exclude any recoupments from proceeds, and exclude any deductions from base cost
General definitions- CGT Framework
* Very important to follow the order of the CGT framework
Capital gains and losses (par 3+5)
• Where proceeds exceed base cost, a capital gain is calculated
• Where base cost exceeds proceeds, a capital loss is calculated
• Sum of capital gains and losses- need to look at each asset separately
Annual exclusion (par 5)
• Annual exclusion of R 40 000 for individuals and special trusts- not for companies or trusts (1)
• R 300 000 in year of death (2)
• Special trust- created solely for persons with a disability (s 1)
• Decreases total net capital gains and losses (thus, even if there is a loss, the loss will get less)
• Cannot take a gain and make it a loss, and the unused portion cannot be carried forward to another year
Aggregate capital gain and loss (par 6+7)
• Sum of capital gains and losses, less the annual exclusions (before the carry forward of assessed losses from previous
years)
• Also mentions “gains required to be taken into account”- refers to roll-overs that was not taxed in earlier years of
assessment
• Important to remember that a loss also gets reduced by the annual exclusion
Net capital gain or assessed capital loss (par 8+9)
• Aggregate capital gain less the assesses capital loss from the previous year
• Assessed capital loss is either created by capital gain that is exceeded by capital loss from precious year (9(a)), or when
there is an aggregate capital loss, and an assessed capital loss of the previous year (9(b)), or when there was no
aggregate capital loss or gain in the current year, but an assessed capital loss from the previous year (9(c))
• Assessed capital loss cannot be deducted- carried forward to the next year, regardless of whether the person is carrying
on a trade
Taxable capital gain (par 10)
• “Taxable capital gain” is referred to in s 26A (thus no
mention of loss in Act, and thus not included)
• 40% for individuals; 80% for companies, company
policyholder funds, and risk policy funds- of net capital
gain
Asset (par 1)
1. Property of whatever nature (movable of immovable) – (very wide definition, mostly all inclusive)
2. This includes tangible and intangible assets (corporeal and incorporeal)
3. Including any coin made mainly from gold or platinum
4. Including rights or interests of whatever nature in such property.
* Currency (money in bank) is excluded from the definition (but cryptocurrency is not excluded)
* When dealing with non-capital assets, will still meet the definition of an asset, but the CGT implications will be 0, as
the amounts would already have been taken into account for normal tax- as the principle Act takes preference
Disposal
• General principle- a person held an asset at the beginning of a year, but now no longer holds it
