“Although capital gains tax (CGT) was introduced in South Africa with effect from 1 October 2001, it remains a complex tax, difficult to apply in practice. Despite us being nearly eight years into implementation of the Eighth Schedule to the Income Tax Act, taxpayers, both individuals and corporate, are still battling with what was intended to be simple and clear, yet technically correct provisions. However, CGT is internationally known to be an extremely complex tax and the situation is no different in SA” says Sizwe Ngwenya, Corporate Tax Consultant at PricewaterhouseCoopers SA. “Many taxpayers will be grappling with its application, perhaps for the first time, as the individual tax filing season started on 1 July 2009.”
Ngwenya says the problem with the ongoing application of CGT in SA has been exacerbated by the fact that, as it is a relatively new tax, since its inception, there have only been a handful of court decisions on the matter.
In addition, Ngwenya says the South African Revenue Service (SARS) is often not in a position to provide guidance on its interpretation and application of complex practical issues, as it does not yet have a standard practice. “Although SARS has published a comprehensive CGT Guide, (available on its website), it is somewhat difficult to address all the practical issues relevant to the application of CGT, and the Guide goes to over 720 pages, containing extensive material. It would certainly be too long and unwieldy for non-professional readers, many of whom are in fact affected by CGT. Perhaps, this is where the possibility of using the few court cases and previous rulings, we have had on CGT thus far, can be of crucial assistance.”
Ngwenya says that even the basic exercise of determining a taxpayer’s taxable capital gain or assessed capital loss is often very complicated as several different provisions have to be taken into account. It is often easy to overlook one or more of the provisions, with significant financial implications for taxpayers.
Levying CGT presupposes the presence of four so-called “building blocks”, namely the disposal of an asset for proceeds that exceed its base cost. All four of these building blocks must be present before a taxpayer has to account for CGT.
To determine whether a taxpayer has to account for a capital gain or a capital loss, several steps have to be followed. Firstly, the capital gain or capital loss arising from disposal of assets during the year of assessment has to be determined. Secondly, at the end of the year of assessment, all the capital gains and losses generated during the year of assessment must be added together to determine whether a taxpayer has the so-called “aggregate capital gain/loss”. Thirdly, any assessed capital loss from a previous year must be brought forward and taken into account, and this may result in a taxpayer having either a net capital gain or another capital loss for the current tax year. The final step is to include in a taxpayer’s taxable income the percentage of the net capital gain that is taxable, (which is 50% for Companies, Close Corporations and Trusts and 25% for Individuals and Special Trusts) to carry forward the resultant capital loss, when assessed, to the following tax year, to be offset against capital gains in future years of assessment.
Ngwenya also highlights that before taxpayers undertake the exercise of calculating a capital gain/loss, they must determine whether the particular disposal falls within the South African tax net. “In principle, SA residents pay CGT on the disposal of worldwide assets, while non-residents are subject to the SA CGT rules on SA fixed property and so-called “permanent establishment” assets (e.g. where the non-resident runs a business in SA).
“But this question is not determined solely with reference to South African domestic law. Where the South African resident disposes of foreign assets, or a non-resident disposes of SA assets, the provisions of a double tax treaty between South Africa and the foreign country may be decisive in determining whether South Africa has the right to tax the capital gain.”
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