Resident and non-resident related disposals
This category deals with the following-
- Persons becoming resident
- Persons becoming non-resident
- Assets of permanent establishments, (“PE’s”)
Persons becoming resident -
Apart from any fixed property or certain defined interests in fixed property that that person may have in South Africa, that person is treated as having diposed of all of his worldwide assets on the day before becoming resident. That person will then be treated as having reacquired those assets on the same day at market value.
This provision, like certain others, does not trigger a CGT event Its purposes is to establish a base cost for CGT puproses.
As far as the base cost is concerned, the market value of such assets does not necessarily stand. This provision is made subject to the provisions of paragraph 24, which latter
provision contains certain complicated rules to prevent, amongst other things, the creation of fictitious losses upon the future disposal of those assets.
The reason for the exclusion of fixed property and certain interests in fixed property from the disposal event is because non-residents are subject to CGT on disposals of such assets. There is thus no need to establish a (new) base cost for them.
A person who -
- ceases to be a resident, or
- in terms of the application of a double tax treaty is treated as non-resident,
is treated as having disposed of all of his worldwide assets, except fixed property and certain defined interests in fixed property.
The person referred to in the first bullet is self-explanatory. This could refer to a natural person who becomes non-resident, a company, trust and so on. It would also include those
persons who are treated as resident due to the time they may have spent in South Africa, (these rules are fairly complex), and become non-resident either because of having left permanently or temporarily. (It is
quite possible to become non-resident for a period and resident shortly thereafter under these rules For these people CGT will be a bit of a nightmare).
The second bullet is a little obscure and probably a little unfortunate for the person concerned. As noted above persons can be treated as
residents simply due to the time they have spent in South Africa over a period of time. Should South Africa, for example, enter into a double tax treaty with an expatriate’s home country, it could be that in terms
of that treaty South Africa may not be able to tax that person as a resident. In other words the terms of the treaty will treat him as a non-resident for tax purposes. The day before the treaty takes effect, will be
the day on which the CGT event, (disposals), take place.
This event triggers a CGT liabilty in repsect of all assets apart from those fixed property related assets referred to above. As non-residents are taxed on those fixed peroperty
interests, there is no need to trigger a CGT event at the time of becoming non-resident. In this case the CGT will be collected when disposed of in some other manner.
Peculiarly, the person concerned is deemed to have reacquired the assets at the same value that was treated as the proceeds in respect of the deemed disposal. This allows that
non-resident to establish a cost, (not necessarily the base cost), in respect of those assets in the event of becoming resident again. Should this eventuate, the provisions relating to commencing to be a resident will apply.
Permanent esablishment, (PE) related deemed disposals and aquisitions -
A permanent establishment is a terms used to describe what is usually a taxable business presence by non-resident. This would typically include branches of foreign companies,
construction sites, and so on.
Unlike residents who are subject to CGT on all “assets”, non-residents are subject to CGT on the disposal of certain assets. Specifically, insofar as PE’s are concerned, the disposal of South African based assets of PE’s are taxable.
In the context of PE’s, the following events are treated as deemed disposals and acquisitions-
- An asset that becomes an asset of a PE otherwise than by way of acquisition, and
- An asset that ceases to be an asset of a permanent establishment otherwise than by way of disposal.
The first case does not give rise to capital gains and losses. This event is meant to cover situations where an asset of the foreign company is brought to South Africa for use in its
local PE. This event has the effect of establishing a base cost for the asset. The timing of the event is the day before the event takes place and the base cost will be represented by the asset’s market value on
The second event is the exact opposite. This covers a situation where a PE withdraws an asset from South Africa for the company’s
own use elsewhere. There is no disposal in the traditional sense of the word as the company would still own the asset upon its withdrawal from, for example, its South African branch. As such this event gives rise to
the potential for CGT.