plan4cgt - Fundamentals - basic

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Lower - Capital assets; Effective tax rates; Process flowchart; Intention

Lower level - Inclusion rates; Annual exclusion; Administration

Lower level - How CGT fits into income tax framework - exampleBasic observations. Following year adjustments.

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Basic fundamentals of CGT

The South African Capital Gains Tax, (CGT), system is embodied within the Income Tax Act itself, (the Eighth Schedule to the Act). Although the term ‘capital gains tax’, (CGT) is used there is really no such thing! It all boils down to this - South Africa, from 1 October 2001 onwards, taxes capital gains and the way it does so is by including a portion the of the year’s net gains in taxable income. Thereafter income tax applies. Nevertheless, throughout this site we generally refer to the tax as CGT.

The process of including the annual net gain position into taxable income is quite tortuous. In this regard we refer you to the following links-

Simplistically, the CGT system will tax the gain on the disposal of a capital asset, (each asset disposed of in a tax year has to be treated as a separate disposal). The CGT regime is extremely complicated and it is quite possible to make disposals without even knowing it. Furthermore, even being let off a liability by a creditor is twisted into being regarded as the disposal of an asset. Be careful!

There are certain concepts that are key to the whole CGT system; SARS refer to them as the building blocks. These building blocks are “asset”, “disposal”, “proceeds” and “base cost”.

The event that triggers CGT is the “disposal” of an “asset”. At this point we will keep it fairly low key to enable you to gain an elementary understanding the CGT system.

     “Asset”- this term encompasses everything. Everything except currency, (the disposal of foreign currency is also taxed). So if you are a resident and you dispose of any capital asset (wherever it is situated), you have triggered the CGT legislation. Disposals of certain assets do not attract CGT by virtue of the exclusion of some or all of the capital gain/loss.

    Non residents are taxed on the disposal of certain assets only.

    “Disposal”- virtually every way of disposing of an asset is covered, be it donation, destruction, expropriation, waiver and lots more, even creating an asset can be a disposal. To complicate matters further there are certain deemed disposals, (events treated as disposals).

    “Proceeds” as you might expect this encompasses what you receive or are entitled to receive. However, in certain circumstances, for example, upon death, proceeds are deemed to arise. There are also certain inclusions and exclusions to proceeds.

    “Base cost” this concept is critical! The higher the asset’s base cost, the lower the capital gain, but getting it right is another matter! As far as assets acquired on or after 1 October 2001 is concerned, mainly costs associated with the acquisition of assets and even certain costs related to the disposal of assets are included in base cost. Much of this site is dedicated to base cost. The determination of the base cost of assets acquired prior to 1 October 2001 is complex!

A capital gain/loss is calculated by subtracting the base cost from the proceeds arising upon the disposal of an asset. Capital gains and losses also occur as a result of adjustments to proceeds or to base cost in years following the disposal of an asset -see following year adjustments.  We cannot over-emphasize the complexities and pitfalls associated with the building blocks. If you, at this early stage, want to have a look at some of them, the following links apply -

    Assets - Part disposals

    Disposals - Meaning of; Events treated as disposals; Events treated as disposals and acquisitions; Events not treated as disposals; Timing rules

    Proceeds – Inclusions in proceeds; Exclusions from proceeds.

    Base cost – Expenditure included in; Non-allowable expenditure; Reductions of base cost; Treatment of assets acquired prior to 1 October 2001, (pre-valuation date assets).

    Capital gains and losses that are excluded

    Capital gains and losses that are deferred, (rolled over)

    Various tax traps.

Who is taxed on what

Navigation of this part of the site

This part of the site is an overview of the CGT system. Above, on this page, the very basic fundamentals are outlined. The rest of this part, under the main heading of fundamentals, is essentially concerned with providing examples as to what capital assets are; the effect of the intention of a taxpayer; what inclusion rates are; what the annual exclusion is; what the effective tax rates on capital gains are; what capital gains and losses are and how adjustments to proceeds and base cost are dealt with. There is a flowchart illustrating how CGT fits in to the income tax system and a numerical example as to how capital gains will be taxed. Some basic observations relating to the information contained in this part are also set out.