plan4cgt - Disposals - Simultaneous disposals and acquisitions

Higher level topic - Disposals and deemed disposals - basic rules

At this level - Elaboration & examples of disposals and of simultaneous disposals and acquisitions.



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The topics on this page elaborate and give examples on simultaneous disposals and acquisitions. In effect these are deemed disposals.



Quick links to topics on this page and the related page-

Conversion of asset into trading stock.

Assets ceasing to be trading stock.

Assets becoming personal-use assets

Assets ceasing to be personal-use assets

Waiver of debts, (on related page)

Resident/Non-resident related disposals, (on related page)


Conversion of assets into trading stock, (paragraph 12(2)(c))

Relevant points in brief -

  • This disposal event will arise due to the change of intention on the part of the taxpayer.
  • This provision creates a capital gain/loss event and establishes a value in respect of the asset that is converted into trading stock.
  • The time of disposal rule that applies to this event is the day before the event takes place, (paragraph 13(1)(g) refers).

As a result of the introduction of this rule an amendment was made to the trading stock provisions of section 22(3). Effectively this allows a taxpayer to value that trading stock at the amount that was recognised as the proceeds (i.e. the market value of the asset), that were brought to account in determining the capital gain/loss.

Working out the capital gain/loss

The market value of the asset is treated as the proceeds. The paragraph dealing with this is silent as to what comprises of the assetís base cost. As such, the base cost would have to be determined by the relevant base cost provisions. This factor creates somewhat of a tax trap in that the carrying value of certain fixed assets, (before the change of intention), could inlcude non-qualifying costs, (such as interest), but this would be more the exception than the norm.


Crane - Rent (Pty) Ltd is the the business of hiring out cranes. In this regard its modus operandi is to acquire cranes at auctions, refurbish them, and rent them out. It has carried out this type of business in this manner for a number of years. On a business trip into Africa, Phil, the managing director, realises that there is a much more profitable business in the market of acquiring cranes, (in the same manner), refurbishing them and exporting them. The crane hire business is immediately discontinued.

For the purposes of this example we will assume that the cost of refurbishment was capitalised into the cost of the cranes, (quite possibly though it was treated as repairs), and that there was only one crane in stock, (which was carried in the books at R200 000). The market value of that crane upon the day before the day of the change of intention was R300 000.

The crane was sold a little later for R350 000.  

In this case a capital asset has been converted into trading stock. This is a deemed disposal for CGT purposes. The R300 000 market value will be treated as proceeds for the purpose of computing the capital gain. The base cost should be the R200 000 carrying value. As such, a R100 000 capital gain arises on the part of the company.

The market value that was treated as the proceeds in terms of this deemed disposal rule now becomes a deemed cost in terms of the provisions that deal with trading stock, (section 22(3) and section 22(2)). The stock carries a value of R300 000 for income tax purposes.

In the year the crane is sold for R350 000, a trading stock deduction of R300 000 is available. As such, the taxpayer will be taxed on taxable income of R50 000.

To sum up, (assuming Crane - Rent does not declare a dividend, on which STC would be payable), the tax payable will be -

  • R15 000 on the R100 000 capital gain, and
  • R15 000 on the taxable income arising on the sale of the crane, [(R350 000 less R300 000) x 30%].

This isnít such a bad result! Had there been no amendment to the provisions of section 22, (the relevant stock provision), the cost of the stock, (i.e. the cost that would have been deductible against the R350 000 income), would have been only R200 000. This would have meant that the taxpayer would have paid tax on the difference between the R200 000 actual costs incurred and the R300 000 twice.(Once in computing the capital gain and once again on the sale proceeds; the excess over the R300 000 sale proceeds would only have been taxed once.) As such, the amendment to section 22 was necessary to prevent double taxation. To sum up had section 22 not been amended, the tax would have been -

  • R15 000 on the R100 000 capital gain, and
  • R45 000 on the difference between the actual costs qualifying for deduction, (R200 000), and the R350 000 proceeds, at the 30% corporate rate.

Had capital gains tax not been introduced, there would have been no need to amend section 22. As such, the taxpayer would have paid tax on the difference between the R350 000 proceeds and the R200 000 costs incurred i.e. R45 000.

This example shows as that CGT is not all that bad, the taxpayer is actually better off, (this is one of the few occasions where this type of result arises). So the question is, has SARS made a mistake?

The answer may be - not necessarily! For one thing, taxpayers that tread the thin line between trading in an asset and not trading in an asset may be encouraged to pay a little more tax for peace of mind, i.e. they can own up to trading and bear less tax than previously. This type of reasoning could have the added advantage of cutting down the the number of capital versus revenue disputes.

Nevertheless, this provision does create some tax traps aside from the tax trap relating to the base cost of the asset, referred to above). The more insiduous traps relate more to -

  • Ignorance - the taxpayer may not be aware of such a provision and only years later the capital gain issue comes to the fore.
  • The fact that as far as the taxpayer is concerned, he is disposing of a capital asset. The existence of CGT will make SARS more aware of the disposal of Ďcapital assetsí on the part of taxpayers. Expect many taxpayers to get caught trading in assets or getting caught in being engaged in profit-making schemes.

Both of these results raise a number of further issues-

  • If it turns out that you were trading in what were previously capital assets, how do you prove what the market value was on the day before the date of change of intention, (i.e. years earlier)? You may not be able to take proper advantage of the stock valuation.
  • You may be in for interest charges, (or other penalties), as a result of not accounting for a capital gain in terms of this deemed disposal provision.

Assets ceasing to be trading stock, (paragraph 12(3))

This type of disposal event can be brought about in a number of ways -

  1. assets applied for taxpayerís private or domestic use;
  2. by way of donation;
  3. by way of disposal other than in the ordinary course of trade at a value that is less than the assetís market value;
  4. by way of a company distribution.
  5. where the asset was applied for purposes other than the disposal thereof in the ordinary course of trade under any other circumstances apart from 1, 2 or 3 above.
  6. where the asset simply ceases to be held as trading stock. This situation, we believe, would usually arise as a result of a  change of intention, (this can turn out to be a huge tax trap).

Relevant points in brief-

  • This applies where assets cease to be held as trading stock, otherwise than by way of disposal, (ďas contemplated in paragraph 11Ē). There is a problem here!
  • The disposal is deemed to take place on the day before the event takes place.
  • The disposal is treated as having taken place at a consideration equivalent to the amount that is included in that personís income in terms of section 22(8).
  • The person is treated as having reacquired the asset at the same value as that that was included in income, (as per the previous bullet).

The purpose of this paragraph seems to be to give you an opportunity to value the asset for CGT purposes at the value that was included in your income, (i.e. the base cost will equate to the amount that was included in income).

Section 22, referred to in the third bullet, deals with the application of what was once trading stock. It deals separately with the five circumstances set out above. The effect of this section is to include an amount in taxable income in respect of what was previously trading stock. In order for this section to be triggered, the cost price of such stock must have been taken into account in the determination of taxable income in any year of assessment. The process may become clearer with an example.

Company A has a certain piece of land it acquired for R100 000 some years ago. Its intention from the outset was to divide the land into plots and sell them at a profit. It subsequently changed its intention and decided to build its head office on that land. At that time, (or the day before the change of intention), the land was worth R300 000. Company A got into financial difficulties before even commencing on building its head office and was forced to sell its surplus assets so as to avoid being placed into liquidation by one of its creditors. The land was sold for R250 000.

The first question is does section 22(8) apply? In this case it does as the cost of the land, being trading stock, would have been deducted from income in the year of acquisition. The same amount would have been added back into closing stock thereby creating a tax neutral effect. But the fact of the matter is that the trading stock would have been taken into account in the determination of taxable income.

The next step is to determine is how section 22(8) applies to this cicumstance. In this case the market value of the stock must be included in taxable income. (See the table below). Therefore in the year the change of intention takes place, R300 000 will be included in income. As the land cost R100 000, the taxpayer will have created taxable income of R200 000, (as a result of changing its Ďmindí! As such income tax of R60 000 is payable, (at the thirty percent corporate rate).

The R300 000 now becomes the landís base cost, (in terms of this deemed disposal rule). The subsequent sale of the land for R250 000 results in a R50 000 capital loss. What a disaster!

Had the company not changed its intention section 22(8) would not have been triggered and income tax would have been payable on only R150 000, (R250 000 selling price less the R100 000 cost).

The above example illustrates the mechanics of this deemed disposal and acquisition provision. Section 22(8) is now a huge tax trap. If you refer to the numbered circumstances above, items 5 and 6 were not there until the CGT legislation was enacted. The others have applied for some time. The table below sets out the values that are included in income in terms of section 22(8) and consequently the value that applies to the base cost of the asset thereafter.

Summary of values included in income and future base cost determination.

Type of transaction.

Value included in income. Base cost for future disposal.

Applied for domestic use

Cost price less any provision accounted for.


Market value

Disposal not in ordinary course of business at less than market value

Market value less the consideration received/accrued

Distribution by a company, (as a dividend or otherwise)

Market value

Asset applied in any other manner other than for disposal in ordinary course of trade

Market value

Asset ceasing to be trading stock

Market value

Strange technical difficulty

We mentioned that there could be a technical difficulty with the application of this provision and the problem is that it could prejudice the taxpayer.

The wording of the provision specifically brings the deemed disposal and reacquistion in operation if there has been no disposal under the normal/general disposal provision, (paragraph 11). However, paragraph 11 specifically includes donations and company distributions as disposals. Therefore it could be argued that this provision does not apply to such disposals.

The implications of this are difficult to comprehend! Given that it is the intention of this provision to include these types of transaction within its ambit, (as is evident from SARSĒ draft Compehensive Guidelines to Capital Gains Tax), perhaps there should not be too much concern. Nevertheless, SARS and the courts are there to uphold the letter of the law. As stated, this oversight will in all likelihood prejudice the taxpayer as section 22(8), would, in the absence of this CGT provision, include the designated value in income and tax it. If the CGT provision were not to apply to donations etc, it would result in an element of double taxation as that amount included in income in terms of section 22(8) would not rank as expenditure incurred for the purposes of determining the base cost of the asset.


Assets becoming personal-use assets

Capital gains and losses made on the disposal of personal-use assets are disregarded. Such assets are those owned by natural persons or special trusts that are used mainly for purposes other than the carrying on of a trade. Capital gains and losses on the disposal of certain specified assets such as gold coins, immovable property and boats in excess of 10 metres in length do not qualify as personal-use assets, thus rendering any gains and losses upon their disposal taxable.

This deemed disposal and reacquision provision arisis when no conventional disposal, (as per paragraph 11), has taken place. As such, this event would happen typically where an asset (other than trading stock) that was previously put to use in a business environment, is applied for personal use.

In most cases capital gains would be insignificant due to the very natiure of personal-use assets and due to the fact that they are depreciating items.

The timing of the transaction is the day before the event takes place.

Example of what may be a relatively significant event -

You acquire a nine-metre boat after 1 October 2001 for R200 000 for the purposes of operating a dive school. Wear and tear, (depreciation), allowances to the full value of R200 000 have been claimed for income tax purposes. After a period of ten years you discontinue the dive school and use the boat for personal fishing trips. The value of the boat at that time was R150 000.    

The boat was not previously a personal-use asset, it has now become one. As such the deemed disposal provision operates. The R150 000 market value will be the proceeds and the base cost will be zero, (the original cost of R200 000 has been claimed for income tax purposes). As such a capital gain of R150 000 arises.

What is really strange is that if the boat was an eleven-metre boat, it would have fallen outside of the personal-use asset definition. In this case there would be no capital gain.

If you think that is unfair, it gets worse! If that boat is subsequently sold for anything up to R200 000, that amount will constitute a recoupment of wear and tear allowances previously claimed for income tax purposes. The full amount received or accrued up to that amount will be taxable in the normal way.

Unintended perhaps, but double taxation nevertheless!

Assets ceasing to be personal-use assets

Capital gains and losses on the disposal of personal-use assets are disregarded. As such this deemed disposal and reacquistion provision will not trigger any capital gain or loss.

This provision, as with the others described above, operates where there has been no disosal in the traditional sense, (as per paragraph 11). It will typically operate where personal-use assets are applied for business purposes. For example, a nine-metre boat previously used for leisure becomes a business asset in the dive school which you have started. This change in application of the use of the boat will not give rise to a capital gain or loss as capital gains and losses on the disposal of personal-use assets are disregarded.

The effect of this provision is to establish a base cost in respect of the asset. In this regard the base cost will be equivalent to the market value on the day before the event, (change in use).

Had the asset been an eleven metre boat, (i.e. a boat that never qualified as a personal-use asset), this deemed disposal provision would not be activated. This means that the base cost of this, let us say, non-qualifying personal-use asset, upon its application in the dive business, would be equivalent to the original cost plus other qualifying base cost expenditure, (if acquired after 1 Ocotber 2001). If acquired prior to this date, the complicated pre-valuation date asset rules would apply in the determination of that assetís base cost.

End of page - The remaining deemed disposals and acquisitions are dealt with on another page, they are -

Waiver of debts

Change of place of residence disposal