Numerical example as to how CGT fits into the Income Tax Act
A natural person sold an asset with a base cost of R40 000 for R100 000 and sold another asset with a base cost of R120 000 for R100 000. There is a R60 000 capital gain on the disposal of the first asset and a R20 000 capital loss on the disposal of the second. All of this happens in one tax year and for the purposes of this example we will assume that the taxpayer had a brought forward assessed capital loss of R14 000.
The terminology in inverted commas is that which is used in the legislation.
We get the following result-
"Capital gain" on asset 60 000
"Capital loss" on asset 20 000
sub-total 40 000
less "Annual exclusion" 10 000
"Aggregate capital gain" 30 000
less "Assessed capital loss" brought forward 14 000
"Net capital gain" 16 000
Multiply by the relevant inclusion rate i.e. 25%
Equals "Taxable capital gain"
It is this R4 000 "taxable capital gain” that will be included in income for income tax purposes. It is taxed in the normal way. For example, if the taxpayer’s taxable income, (prior to the R4 000
result), is in excess of R255 000, it will be subjected to income tax at the maximum marginal rate of 40%, (as per the 2003/4 income tax tables).
Notes to example
- The disposal of an asset will give rise to a capital gain/loss or zero position.
- The qualifying portion of capital gains/losses for the year are added together to get to a net figure.
- The net figure, (whether positive or negative), will be reduced by the “annual exclusion”. The result is known as an “aggregate capital gain/loss”, as the case may be.
For more detail on the annual exclusion click here. If there is no “assessed
capital loss” brought forward from the previous year, the “aggregate capital loss” will become an “assessed capital loss”. This will be carried forward to the next year.
- If the previous year’s position resulted in an "assessed capital loss", that loss is carried forward to the current year. It is used to offset the current year’s
“aggregate capital gain” or add to the current year’s “aggregate capital loss”. In the above example a brought forward loss of R14 000 was set off against the current year’s aggregate capital gain of
- If the current year’s “aggregate capital gain” was R12 000 instead of R30 000, the R14 000 brought forward “assessed capital loss” would offset the R12 000 resulting
in a R2 000 “assessed capital loss”. This would be carried forward to the next year.
- If the sum of the year’s capital gains and losses amounted to anything up to R10 000, (whether positive or negative), the annual exclusion would reduce that figure to zero.
In both cases the R14 000 brought forward “assessed capital loss” would remain intact and would be carried forward to the next year.
To recap, the above example, after applying the R10 000 annual exclusion and after offsetting the R14 000 brought forward assessed capital loss, gave rise to a net result of R16 000.
As the taxpayer is an individual only 25% of that result would be included in taxable income.
Also see the following topics-
· CGT process flowchart;
· Annual exclusion and inclusion rates; and
· Table of effective tax rates.
Seeing that capital gains, or rather, the “taxable capital gain ”makes its way into taxable income for income tax purposes, it means that a significant gain will push you higher into the income tax brackets. So while your normal income may be low and subject to a relatively low rate of tax, a taxable capital gain may well get taxed at a much higher effective rate, as it gets added to your other taxable income, (such as salaries, interest and so on). For more on this click here.
An assessed capital loss can only be set off against future capital gains, (or more correctly, the “aggregate capital gain”). Therefore, if the disposal of your very last major asset results in a capital loss, and in previous years you experienced CGT, then you have really got your planning wrong. The trouble is, this can happen through no real fault of your own. This is a tax trap.
SARS have got their cake and are eating it. The system says “ I am taxing you on your capital gains, (because I am lumping a portion of them in your taxable income), but I am not
allowing you to deduct your net capital loss position from your normal income”. The only real positive to be taken out of this, is that the “assessed capital loss ”may be carried forward indefinitely.
Following year adjustments
Upon the disposal of an asset the capital gain/loss is determined by subtracting the base cost from the proceeds. But what happens when, say, the proceeds are under dispute and only become receivable in a later year?
Or, the proceeds you thought you were going to receive are never received? This can happen for many reasons such as the debtor going bad, warranties upon the sale of a business not being met, and so on.
These conditions, (and others) are catered for. However, there are significant tax traps insofar as the treatment of pre-valuation date assets are concerned. Many types of transactions will need careful legal drafting to avoid these traps.
We use the term ‘following year adjustments’ to describe the capital gain/loss arising by reason of future adjustments to either the base cost or proceeds.
The following types of adjustments give rise to capital gains-
- Amounts received/accrued during the current year that were not taken into account in proceeds in the year of disposal; or
- Base cost expenditure that has subsequently been recovered/recouped.
The following types of adjustments give rise to capital losses by reason of adjustments to proceeds-
- Where that person is no longer entitled to those proceeds.
- That have become irrecoverable; or
- Have been repaid or become repayable.
The following types of adjustments give rise to capital losses by reason of adjustments to base cost expenditure that was not previously taken into account-
- Base cost expenditure that has been paid; or
- Base cost expenditure that has become due and payable.
Aside from the above adjustments, all of which arise by reason of the ‘capital gain’ and ‘capital loss’ paragraphs of the CGT legislation, following year adjustments arise in respect of the deferral,
- Deferring gain on involuntary disposal roll-over and not complying with replacement provisions, (gain)
- Deferring gain on replacement of asset roll-over provision and not complying with replacement provisions, (gain).
- Special treatment when in compliance with the above two scenarios, (gain).
- Not complying with the two-year period in terms of the small business disposal exclusion, (gain).
None of the above following year adjustments cater for errors made. For example, if you understated base cost in the year of disposal it should be corrected by way of re-opening the