South Africa: Capital Gains Tax

The introduction of capital gains tax in South Africa has been finalised with parliamentary approval of the Bill. The original commencement date of 1 April 2001 had proved to be unrealistic in the light of the extensive discussions and submissions by the business community, and the tax will now come into operation on 1 October.

In another bow to the principle of festina lente, the time limits for obtaining valuations of assets has been extended. Originally, taxpayers were given one year in which to obtain valuations of their assets in order to establish base costs. This has now been extended to two years. The practical effect of this extension is that CGT is unlikely to arise in respect of many assets disposed of within the two year period. If a taxpayer is entitled to establish an initial valuation at any time before 30 September 2003 and declare it to be the commencing value with effect from 1 October 2001, it stands to reason that the proceeds of a sale at arm’s length will be the market value of the asset. For example, the market value of an asset might be R100 on 1 October 2001. The taxpayer chooses not to obtain a formal valuation, and then disposes of the asset on 30 September 2003 for its then market value of R150. Had he obtained a valuation on 1 October 2001, he would have a taxable capital gain of R50 on disposal. By not doing so, he will be able to argue that the market place has established the value to be R150 and elect that as his commencing value. As a result, there will be no capital gain.

After much debate, it has been decided not to impose tax on unit trusts, but rather to tax the investors when they dispose of units. Understandably, SARS wanted to reduce its administrative burden by taxing the trusts on capital profits, there being far fewer trusts than individual investors to worry about. However, the industry lobby prevailed and the tax free status of unit trusts will extend to CGT. The price, however, is a high one, expressed in the amount of information demanded from the trusts. This consists of an annual return disclosing:

• the names and addresses of unit holders who have disposed of units during the year, the number of units disposed of by each, and the proceeds;
• the value of those units on 1 October 2001 established on a weighted average basis;
• the gain or loss in each case;
• in the case of a natural person, the identity number of the unit holder or, if he does not have a South African identification document, any other form of identification;
• in any other case, the registration number of the unit holder.

A new anti-avoidance provision has been introduced, aimed at countering dividend stripping. Where a person disposes of a share within two years of acquiring it, any capital loss incurred must be reduced to the extent that any extraordinary dividend was declared during that period. An extraordinary dividend for this purpose is defined as any dividend or portion of a dividend in excess of 15% of the proceeds on disposal of the share. This provision does not apply to dividends that accrued to any holding or intermediary company in relation to the company.

Certain of the provisions relating to primary residences have been clarified. In this regard it should be remembered that the first R1 million of any capital gain on the disposal of a primary residence is exempt from CGT. This created great uncertainty for owners of smallholdings and farms, where the domestic and business uses of the property are not easily severable from each other. It is now clear that the maximum amount of ground that may be subject to the exemption is 2 hectares, and then only if none of that ground is used other than for domestic purposes. In the case of larger parcels of land, an appropriate apportionment must be made.

The Act introduces a new definition of "spouse" into the law. This will, of course, have a far wider implication than merely CGT; income tax, estate duty and donations tax, not to mention divorce proceedings, will be affected. The definition now consists of three parts: a marriage or customary union recognised in terms of the laws of South Africa; a union recognised in accordance with the tenets of any religion; and "a same-sex or heterosexual union which the Commissioner is satisfied is intended to be permanent", which union shall for this purpose be deemed to be without community of property. It can be envisaged that the Commissioner might at times need Solomonic wisdom in applying the third element; how long is "permanent" in a human relationship, for example?

Now that the law is in place, it remains to be seen whether the overworked SARS authorities will be capable of administering it without causing delays and confusion. It is certain that, for both taxpayer and tax gatherer, a period of fast learning lies in prospect.