Content of the session. Basics Small business asset exclusion Primary residence Discharge of debt Roll-over provisions
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1 Capital Gains Tax
2 Content of the session Basics Small business asset exclusion Primary residence Discharge of debt Roll-over provisions
3 Basics
4 Updates and amendments Inclusion rate Individuals Companies 2016 y.o.a. 33 1/3 % 66 2/3 % 2017 y.o.a. 40% 80% Annual exclusion 2016 y.o.a. R y.o.a. R40 000
5 Base cost Pre-VD Asset Post-VD Asset Para 20 expenditure Less : VAT claimed Less : Allowances Para 26 Para 27
6 Small business asset exclusion
7 Basics What is a small business? Business of which the MV of all its assets (as at time of disposal) R10 million What is the exclusion? R per person per lifetime Who qualifies for this exclusion? Any natural person who: at the time of the disposal, that person held for his or her own benefit that active business asset, interest in the partnership, or interest in the company (as the case may be) for a continuous period of at least five years prior to that disposal; and was substantially involved in the operations of the business of that small business during that period; and has attained the age of 55 years; or the disposal is in consequence of ill-health, other infirmity, superannuation or death.
8 What should be disregarded? The following capital gains should be disregarded: Disposal, by a natural person, of an active business asset of a small business owned by that natural person as a sole proprietor; or an interest in each of the active business assets of a business, which qualifies as a small business, owned by a partnership, upon that natural person s withdrawal from that partnership to the extent of his or her interest in that partnership; or an entire direct interest in a company (which consists of at least 10 per cent of the equity of that company), to the extent that the interest relates to active business assets of the business, which qualifies as a small business, of that company
9 Small business assets What is an active business asset? % Wholly and exclusively for business purposes Excluding: Financial instruments Assets held to generate annuity income, rental income, forex gains or royalty income
10 Additional factors to consider Capital gain must be realized within 24 months after disposal > 1 small business Include the capital gain of all businesses when claiming the R exclusion, provided that the market value of all of the active business assets < R
11 Example On attaining the age of 55 in 2010 Mr. T wishes to retire. Mr. T is substantially involved in a business along with a business partner Mr. Q. They incorporated a close corporation and a company six years ago. The close corporation operates a successful brewery. The market value of the brewing plant and equipment amounts to R A liability amounting to R in respect of this equipment is still outstanding. The only other asset owned by the close corporation is a 100% shareholding in the company. The company s only tangible asset is the brewery building which is let to the close corporation for a market related rental. The market value of these shares amounts to R Mr. T and Mr. Q each hold a 50% interest in the close corporation. Mr. Q purchased Mr. T s interest in the close corporation upon his retirement for R The member s interest originally cost each party R
12 Solution The calculation of the capital gain in respect of the sale of the brewery is as follows: Proceeds R Base cost R Capital gain R The question then arises which portion of this gain will qualify for the paragraph 57 relief. Active business assets to the total assets (2m/(2m + 1,75)) 53,33% Proceeds attributable to active business assets (1,8m x 53,33%) R Base cost attributable to active business assets ( x 53,33%) R Capital gain attributable to active business assets R Can claim exclusion on this amount
13 Primary residence exclusion
14 Primary residence example R per residence owned and occupied by a natural person and/or special trust in which a natural person or a beneficiary of a special trust: Ordinarily reside as his or her main residence; and Use it mainly for domestic purposes House was bought in 2003 for R Sold in 2016 year of assessment for R Therefore, capital gain = R R = R info@dsot.co.za
15 Primary residence 15
16 Primary residence 16
17 Apportionment required Qualifying size The exclusion will apply to land which: Does not exceed 2 hectares; AND Is used together with the residence mainly for domestic or private purposes; AND Is disposed of at the same time and to the same person as the residence Period ordinarily resident Non-residential use i.e. used for carrying on a trade by the person holding an interest in the primary residence Applies only to the owner, not by that person s spouse!! (provided that >51% in total used as primary residence) Exception : Trade = temporary letting No apportionment necessary 17 info@dsot.co.za
18 Interrupted ordinary residence away for extended period for business or holiday when deems another residence as primary residence Temporary project Acquires the residence on 1 January 2002 Moves, with intention of not returning Disposes of the residence on 31 December 2013
19 Deemed ordinary residence Residence remains unoccupied, but deemed to be ordinarily resident for max of 2 years Offered for sale and vacated the residence due to (intended) acquisition of a new primary residence; OR Residence being erected on land acquired for purpose of being used as primary residence; OR Accidentally rendered uninhabitable, e.g. flood, earthquake; OR Death of the person more than 1 primary residence Apportion if > than 2 years
20 Temporary letting Treat as primary residence for a period of up to 5 years, i.e. no apportionment necessary if: Person (owner, spouse, beneficiary) used the residence as primary residence for a continuous period of 1 year before and 1 year after the period of letting; AND No other residence treated as primary residence; AND Temporarily absent from SA or employed/engaged in carrying on a business in SA >250 km away from residence. 2 years 4 years 20 info@dsot.co.za
21 Proceeds R2 million Ordinarily resident throughout period of ownership; AND Used solely for private and domestic purposes Disregard capital gain / loss Therefore, no need to determine BC 21 info@dsot.co.za
22 Discharge of debt
23 Paragraph 12(5) - Discharge of debt deleted New paragraph 12A Reduction = Debt written off less any consideration given in exchange for write-off Paragraph 12A will apply only if the debt of a person is reduced when consideration < face value of the debt Consideration refers to the true consideration Therefore, MV of the consideration applied for the reduction of the debt When is paragraph 12A applicable? When a debt that is owed by a person is reduced by any amount; AND Debt was used, directly or indirectly, to fund any expenditure other than expenditure in respect of which a deduction or allowance was granted under the Act; OR Debt was used, directly or indirectly, to fund any expenditure incurred in respect of an allowance asset; AND The amount of that reduction > amount applied as consideration for that reduction 23 info@dsot.co.za
24 Paragraph 12A and section 19 interaction and basic working Section 19 (debt of revenue nature) Trading stock on hand 11(a) deduction / opening stock and closing stock must be reduced by debt reduction Excess: Recoupment Paragraph 12A (debt of capital nature) Trading stock disposed of and other deductible expenditure Allowance assets Non-allowance capital assets Recoupment to the extent that the expenditure was allowed as a deduction Reduce BC Excess: Recoupment Future allowances are limited to cost of asset less (reduction amount + previous allowances claimed on the asset) Reduce BC Excess: Reduces assessed capital loss 24 info@dsot.co.za
25 Paragraph 12A(5) - Re-determining the BC of pre-vd assets Why is this necessary? How is this applied? Timing: Deemed disposed of that asset immediately before that debt is reduced Proceeds of old asset: MV of the asset at the time Calculate a capital gain / loss on old asset Immediate reacquisition of the MV Adjustments Decrease new BC by capital gain on old asset Increase new BC by capital loss on old asset 25 info@dsot.co.za
26 Example ABC Ltd borrows R ABC Ltd used R to acquired a new plant at a total cost of R and the remaining R was used to fund tax-deductible expenses. On 1 October 2015, at which time ABC Ltd has claimed R allowances on the plant, ABC Ltd s creditor discharges the R of debt, due to cash flow problems experienced by ABC Ltd. 1. Recoupment of tax-deductible expenses previously claimed under section 11(a). Recoupment in terms of section 8(4)(a) of R Remaining amount of the discharge of debt of R will be applied against the BC of the plant (current BC: R R = R ), thereby reducing the BC to Rnil 3. Remaining debt will be recouped in income (R R R ) = R info@dsot.co.za
27 Question... What happens to the allowances on the plant? Allowances claimable in future cannot exceed: Original CP: R Allowances claimed in the past: (R ) Reduction of debt absorbed by BC: (R ) Therefore, R
28 Paragraph 12A Exemptions Paragraph 12A exemptions Debt owed by a person that is an heir or legatee of a deceased estate, to the extent that The debt is owed to that deceased estate; AND The debt is reduced by the deceased estate; AND The amount by which the debt is reduced by the deceased estate forms part of the property of the deceased estate Debt reduced within a group of companies Debt reduced in course or anticipation of liquidation / deregistration of a company when debtor and creditor are connected persons Paragraph 12A(6) does not apply to any debt owed by a person to the extent that the debt is reduced by a donation as defined in s 55(1); OR any transaction to which s 58 applies 28 info@dsot.co.za
29 Roll-over provisions
30 Involuntary disposals Disposal = operation of law, theft or destruction of assets Must be ELECTED by the taxpayer Does not apply to financial instruments Does not apply to personal use assets
31 Requirements of Involuntary disposal roll-over relief Disposal = operation of law, theft or destruction of assets Compensation BC Satisfy the Commissioner that: Amount compensation from disposal will be used to acquire 1 or more replacement assets; AND All replacement assets = immovable property or assets attributable to a permanent establishment in SA; AND Contract for acquisition concluded within 12 months after date of disposal; AND Replacement asset(s) brought into use within 3 years after disposal of the asset. Extended by max of 6 months if all reasonable steps have been taken
32 Implications of para 65 Disregard capital gain / loss Asset depreciated Take into account when replacement asset(s) is disposed of Asset depreciated Take into account as depreciated Balance when replacement asset(s) is disposed of Contract not concluded / asset not brought into use within prescribed period Take into account when period expires
33 Reinvestment in similar assets Replaces an asset that qualified for specific capital allowances (sections 11 (e), 11D(2), 12B, 12C, 12DA, 12E, 14, 14bis or 37B) Must be ELECTED by the taxpayer Does not apply to financial instruments Does not apply to personal use assets
34 Requirements of Reinvestment in similar assets roll-over relief Compensation BC Satisfy the Commissioner that: Amount compensation from disposal will be used to acquire 1 or more replacement assets all of which will qualify for a section 11(e), 12C, 12E or 11D allowance; AND All replacement assets = immovable property or assets attributable to a permanent establishment in SA; AND Contract for acquisition concluded within 12 months after date of disposal; AND Replacement asset(s) brought into use within 3 years after disposal of the asset. Extended by max of 6 months if all reasonable steps have been taken
35 Implications of para 66 Disregard capital gain / loss Asset depreciated Take into account as depreciated Balance when replacement asset is disposed of Contract not concluded / asset not brought into use within prescribed period Take into account when period expires
36 Example DEF Ltd disposes of one of its machines on 1 August It had a base cost R and DEF receives R for the disposal of the machine. Concludes a contract for acquisition of 2 new machine on 1 November 2006 at a cost of R and R respectively and brings the machines into use on 1 February Assume DEF has a 31 December year-end. Assume that the machines are used in a process of manufacturing.
37 Solution : 2006 year of assessment Old machine: Proceeds R Base cost (R ) Disregarded capital gain R50 000
38 Solution : 2007 year of assessment New machine 1: New machine 2: Section 12C allowance = R x 40% = R x 40% = R = R CGT on old machine: Total = R x R = R x R R R = R = R R x R R x R R R R R6 667 Inclusion rate x 50% x 50% Taxable capital gain R6 667 R3 334
39 Solution : 2008, 2009, 2010 years of assessment New machine 1: New machine 2: Section 12C allowance = R x 20% = R x 20% = R = R CGT on old machine: Total = R = R R x R R x R R R R6 667 R3 334 Inclusion rate x 50% x 50% Taxable capital gain R3 334 R1 667
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