The first draft of the legislation introducing CGT to South Africa has been published and will be considered by the appropriate Parliamentary Committee as soon as parliamentary work resumes after the Christmas break. The legislation takes the form of a schedule to the existing Income Tax Act, with certain necessary changes to the Act itself. The tax will apply to the capital gains of residents from all sources, and to those of non-residents from assets situated in South Africa.
In large measure the draft follows the provisions of the Guideline issued early in 2000 when the Minister of Finance gave notice of his intention to introduce the new tax. There are, however, indications that certain of the strong comments of the business community have been addressed.
Calculation Of Value Of Gains And Losses
The commencement date of the tax will be 1 April 2001. When a taxpayer disposes of an asset after that date, the taxable portion of the gain for most assets may be established in either of two ways. The gain will either be apportioned on a time basis between the number of years during which it was held before 1 April 2001 and the period it was held after that date, or it will be established by comparing the proceeds with the value at 1 April 2001. There is thus likely to be rush by taxpayers to obtain valuations of their assets; a period of two years is to be allowed to enable taxpayers to arrange for such valuations. In certain cases, marketable securities being an obvious example, external market values will automatically apply.
Natural persons will be taxed on 25% of the difference between their capital gains and losses during the year; at the maximum marginal rate of 42%, the effect will be a CGT rate of 10.5%. Other taxpayers will be taxed on 50% of their net gains, which for companies amounts to an effective rate of 18.89% and 21% for trusts.
Disposal
"Disposal" is widely defined for the purpose, and includes virtually any conceivable change in the relationship between a person and property. Some deemed disposals include: emigration; the conversion of a personal-use asset to non-personal-use and vice versa (personal-use assets are exempt from CGT); expropriation; donation; death. Where a disposal takes place between connected persons, it is deemed to have taken place at market value regardless of the actual price used.
Exemptions
No CGT will be payable on the first R1 million of the capital gain on disposal of the primary residence of a natural person. Many residential properties are held by trusts or companies, and this provision caused an uproar when it was first mooted. Taxpayers will now be given one year during which they may transfer such properties into their own names without incurring transfer duty or stamp duty.
As indicated above, gains and losses on personal-use assets are exempt. Such assets are those belonging to natural persons and not used in trade, but excluding coins, immovable property, small aircraft such as microlights, boats not more than 10 metres in length, financial instruments and fiduciary interests.
Also excluded from CGT, in an attempt to encourage small businesses, are the gains of any business whose assets do not exceed R500 000 and which is owned by natural persons alone or in partnership. When such a business is disposed of, or a partner retires, CGT is not payable provided the retiring person is at least 55 years old.
Compensation for personal injury, illness or defamation is not taxable; neither is prize money from legal gambling, games or competitions.
Rollovers
In certain instances the gain may be rolled over until a later date. Expropriation, loss, destruction and damage are examples, provided the assets are replaced within one year. In similar vein, where assets qualifying for capital allowances are disposed of, such as manufacturing plant, ships or aircraft, the gain will be taxed over five years. Where assets are transferred between spouses, the base cost to the recipient spouse is the same as that to the transferor spouse.
When a small business is transferred to a company, the base cost accompanies the active business assets, provided the sellers are natural persons who each acquire an interest of at least 10% of the company and provided the value of the gross assets does not exceed R5 million.
Companies And Shareholders
Where the shares of a company have been valued for the purposes of establishing the base cost, and reserves on hand at that date are subsequently distributed, the base cost will be reduced accordingly. This provision is aimed at preventing the artificial creation of capital losses to be set off against capital gains.
Anti-avoidance Measures
Various measures are proposed to deal with transactions aimed at manipulating base costs, especially during the transitional period between the announcement last year of the intention to introduce CGT and the effective date of 1 April this year.
Future Developments
As the legislation makes its way through Parliament there are bound to be changes before it takes its final form. A future article will examine these changes some time in April.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.