There are several types of taxes levied in South Africa. Among these include employees tax – which is withheld monthly from remuneration payable by an employer to an employee and is paid over by the employer to the Commissioner (South African Revenue Services) within seven days after the end of the month in which it was withheld; dividends tax – on the amount of any dividend paid by any company other than a headquarter company (15% if the dividend was paid or payable before 22 Feb 2017 and 20% if the dividend was paid or payable on or after 22 Feb 2017); donations tax – which is payable on the transfer of assets from one person to another; value-added tax – taxation on the consumption of goods and services; and capital gains tax – a form of taxation that is often misunderstood and thus forms the subject matter of this article.
The Eighth Schedule of the Income Tax Act 58 of 1962 provides for taxable capital gains. Section 26A of the Income Tax Act stipulates that the taxable gain of a person in a given year of assessment shall be included in such person’s taxable income for that year of assessment as determined in terms of the Eighth Schedule. The Eighth Schedule applies only to disposals occurring on or after 1 October 2001. In accordance with the Eighth Schedule, capital gains tax is payable on a capital gain in respect of an asset disposed of during a year of assessment.
Both residents and non-residents are subject to capital gains tax although they are affected differently. Residents are subject to capital gains tax in respect of assets situated anywhere in the world while non-residents are taxed on gains made from the disposal of immovable property (and any interest in immovable property) situated in South Africa and assets attributable to a permanent establishment through which the non-resident carries on business in South Africa.
Elements of Capital Gains Tax:
Capital gain is equal to the amount by which proceeds received or accrued in respect of the disposal of an asset exceed the base cost of that asset. All elements/requirements of capital gains tax must be met before it can be determined whether there has been a capital gain or loss. The elements of capital gains tax follow hereunder.
Paragraph 1 of the Eighth Schedule defines an asset. As defined, an asset includes:
- a) Property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any currency, but including any coin made mainly from gold or platinum; and
- b) A right or interest of whatever nature to or in such property.
Paragraph 11 of the Eighth Schedule describes a disposal as any event, act, forbearance or operation of law which results in the creation, variation, transfer or extinction of an asset.
Base cost refers to the costs directly incurred in respect of the acquisition and disposal of an asset.
Paragraph 35 of the Eigth Schedule provides for proceeds. Proceeds from the disposal of an asset are equal to the amount received by or accrued to, or an amount which is treated as having being received by or accrued to or in favour of the person disposing of that asset.
As a practical example let us consider the following hypothetical set of facts:
Mr Khoza is a South African resident and lives in Johannesburg. During 2003 he bought an art collection at an auction for an amount of R 5 000 000.00. Some of the pieces had to be restored for an amount of R 150 000.00. During 2003 he entered into a lease agreement with an art museum which rented the art collections from him for R200 000 per annum. During 2005 he received an offer from an interested party to exchange his art collection for a helicopter valued R 6 000 000.00. Mr Khoza has a true passion for aircraft and so he accepted the offer. During 2008 Mr Khoza’s father passed away. As the only heir Mr Khoza inherited all assets in the estate including a house in Sandton (into which he decided to move), some shares in a listed company, R 500 000 cash and a luxury motor vehicle.
For estate duty purposes the assets were valued as follows:
The house in Sandton is valued at R2 000 000.00, the shares are valued at R100 000.00 and the vehicle is valued at R150 000.00.
During 2014 Mr Khoza received a business opportunity in the UK through his girlfriend whom he subsequently married in South Africa shortly before he decided to immigrate to the UK. He decided to sell his assets before relocating. He sold the aircraft for an amount of R 5 500 000.00. He sold the house in Sandton for an amount of R 3 500 000.00. He sold the shares for an amount of R 170 000.00 and the luxury vehicle for an amount of R 100 000.00.
Let us now consider the capital gains consequences of each transaction.
Capital gains tax consequences in respect of the art collection
The art collection constitutes an asset in terms of paragraph 1 of the Eighth Schedule as it is movable, corporeal property that is not currency. The R200 000 received annually from the art museum in terms of the lease agreement does not qualify as an asset because paragraph 1 of the Eighth Schedule excludes currency as an asset for the purposes of capital gains tax. The R200 000 would form part of Mr Khoza’s gross income in terms of section 1 of the Income Tax Act. The R200 000 per annum in terms of the lease agreement would also not amount to proceeds in terms of capital gains tax as there has not been a disposal or deemed disposal of the art collection as per paragraph 11 of the Eighth Schedule.
The amount of R150 000 which was used to restore some of the pieces of the art collection forms part of the base cost. This is so because the restoration qualifies as improvements or enhancements to the value of the asset as per paragraph 20(1)(e) of the Eighth Schedule. Had Mr Khoza not leased the art collection to the art musuem (i.e. had he not used it to carry on a trade) it could have qualified as a personal use asset in terms of paragraph 53 of the Eighth Schedule.
The exchange of the art collection for the aircraft amounts to disposal of the art collection. Paragraph 11(1)(a) of the Eighth Schedule deems an exchange as an event of disposal. There has therefore been disposal of an asset.
The proceeds received from the disposal of the art collection amount to R6 000 000.00 as that is the value of the aircraft. The base cost of the art collection is R5 150 000.00 (R5 000 000 + R150 000). The capital gain of Mr Khoza in respect of the disposal of the art collection is therefore R850 000.00.
Capital gains tax consequences in respect of Sandton house
The Sandton house qualifies as an asset in terms of paragraph 1(a) of the Eighth Schedule. According to paragraph 40(1A)(b) where an asset of a deceased is transferred directly to an heir or legatee of the deceased such heir or legatee is treated as having acquired the asset from the deceased at a cost equal to market value of that asset at the date of death of the deceased person. Paragraph 40(2) deals with the capital gains tax treatment of assets disposed of by the executor to an heir or legatee. In any event, per the aforementioned provisions, Mr Khoza will be treated as having acquired the Sandton house at a base cost of R2 000 000.00.
Mr Khoza did dispose of the house for an amount of R3 500 000.00. This amount constitutes the proceeds as far as capital gains tax is concerned. However, paragraph 45(1) provides that a natural person must disregard certain capital gains and losses on the disposal of a primary residence. As you may have noticed from the hypothetical set of facts Mr Khoza decided to move into the house which is an indication that it was his primary residence. Paragraph 45(1)(b) (i.e. the R2 million gross rule) will not be applicable in this regard since the proceeds from the disposal exceed R2 000 000.00. The R2 million gain rule, paragraph 45(1)(a), will find application. In terms of this rule a natural person must disregard capital gains and losses of R2 000 000.00 on the disposal of a primary residence. The set of facts are silent on whether Mr Khoza and his wife are married in community of property or not, but in the event that they are married in community of property and the house forms part of the joint estate, they will have to apportion the capital gain exclusion of R2 000 000.00. This fact would however be irrelevant because the total capital gain on the sale of the Sandton house is R1 500 000.00 (R3 500 000.00 – R2 000 000.00). It will therefore be disregarded in any event.
Capital gains tax consequences in respect of the shares
Section 1 of the Income Tax Act defines financial instruments to include inter alia shares. The definition of asset in the Eighth Schedule is broad enough to include shares. Paragraph 11(2) of the Eighth Schedule provides that the issuing, cancellation or extinction of a share in a company will not be regarded as the disposal of an asset. However, Mr Khoza’s sale of shares will be regarded as a disposal as it does not fall under the events contemplated in paragraph 11(2).
Mr Khoza sold the shares for R170 000.00 which qualifies as the proceeds. The base cost of the shares is R100 000.00 as that was the value of the shares when Mr Khoza inherited them from his deceased father. The capital gain in respect of the disposal of the shares is therefore R70 000.00.
Capital gains tax consequences in respect of luxury vehicle
Paragraph 53 together with paragraph 1 of the Eighth Schedule defines a personal use asset as an asset of a natural person or a special trust that is used primarily for purposes other than the carrying on of a trade. Personal use assets include furniture, works of art, clothing and motor vehicles. The vehicle accordingly qualifies as a personal use asset.
According to paragraph 53 capital gain or loss on personal use assets must be disregarded.
Capital gains tax consequences in respect of R500 000
Paragraph 1 of the Eighth Schedule specifically excludes currency in the definition of asset. There will be no capital gains tax consequences in respect of the R500 000.00 cash inherited by Mr Khoza.
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