Capital gains tax. Taxable capital gain

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Capital gains tax

Marius Botha

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Taxable capital gain

40 000

Less:Deductions

150 000

Conventional taxable income

60 000

Plus: Taxable capital gain

190 000 INCOME

TAXABLE INCOME

Less:Exemptions Gross income

210 000 10 000 200 000

• Taxable capital gain part of taxable income

See pages 74 to 80 of SARS Guide

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Steps to determine taxable

capital gain

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To determine the taxable capital gain

certain steps are to be followed

ƒ

These steps are derived from the

definitions of various terms

ƒ

Capital gain and taxable capital gain are

often used interchangeably (incorrectly so)

Example

Step 1: Calculate the capital gainseparately in respect of each individual asset

Asset 1 (Land)

150 000 Capital gain

Less:Base cost Proceeds on disposal

50 000 200 000

Asset 2 (Shares)

20 000 Capital gain

Less: Base cost Proceeds on disposal

80 000 100 000

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Example

Step 2: Determine the aggregate capital gain(par 6)

A person’s aggregate capital gainfor a year of assessment is the amount by which the sum of that person’s capital gains for that year exceeds the sum of—

• (a) that person’s capital lossesfor that year; and

• (b) in the case of a natural person or a special trust, that person’s or trust’s annual exclusionfor that year

12 500

Less:Annual exclusion

157 500 AGGREGATE CAPITAL GAIN

170 000

Less:Capital losses Total capital gains

0 170 000

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Example

Step 3: Determine the net capital gain

20 000

Less:Assessed capital loss (previous year)

137 500 Net capital gain

Aggregate capital gain 157 500

Step 4: Determine the taxable capital gain

x 25% Multiply by inclusion rate

34 375 Taxable capital gain

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Tax calculation

333 625 Taxable income

34 375

Plus:Taxable capital gain

299 250 24 250 1 750

RA contributions

22 500 Pension contribution

Less:Deductions

323 500 Income

16 500 Interest

Less:Exemptions

340 000 Gross income

40 000 Interest

300 000 Salary

91 777 Tax on R 333 625 (2007 tax year)

333 625 Taxable income (brought forward)

84 577 Tax payable

Less:Rebate 7 200

Assessed capital losses for any year of assessment can only be set off against capital gains arising during

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Pre-valuation date assets

A pre-valuation date asset is

an asset acquired prior to valuation date by a person and which has not been disposed of by that person before valuation date

See page 149 of SARS Guide

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Base cost of pre- valuation

date assets

The determination of the base cost of assets held prior to the valuation date (1 October 2001), comprises of the “valuation date value” of the asset plus any expenditure incurred on or after that date

Post 1/10/2001 expenditure +

Valuation date value =

Base cost

Base cost

Proceeds =

Capital gain

See page 149 of SARS Guide

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Base cost of pre- valuation date assets

There are three possibilities in respect of pre-VD assets if a persons disposes thereof:

1 He made a gain (historically)

2 He made a loss (historically)

3 No records kept of pre-VD expenses

PS To determine “historical” gain or loss deduct all qualifying expenditure (pre and post 1 Oct 2001) from proceeds.

See page 150 of SARS Guide

Example – historical gain

His historical gain is R1 900 000

On 1.10.2006 he sells property for R2 500 000

In 2004 he erected a building on plot for total cost of R400 000 (after VD)

John bought a plot of land on 1 Oct 1995 for R200 000 (before VD)

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Example – historical loss

His historical loss is R200 000

On 1.10.2006 he sells property for R600 000

In 2004 he erected a building on plot for total cost of R500 000 (after VD)

Peter bought a plot of land on 1 Oct 1995 for R300 000 (before VD)

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Example – pre-VD exp unknown

He cannot prove his pre-VD expenses

On 1.10.2006 he sells property for R600 000

Mike bought a plot an asset 1 Oct 1995 for a cash amount of R300 000 but he has no records to prove the expenditure (before VD)

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Historical gain

Note: This paragraph does not apply in respect of an instrument as defined in sec 24J and assets i r o which par 32(3A) is applied (weighted average).

If MV is adopted as VDV and proceeds do not exceed MV (phantom loss) then VDV is the

proceeds minus post-VD expenditure The VD value must be one of

1. Market value on 1.10.2001

2. 20% of (proceeds minus post -VD expenditure) 3. Time-apportionment base cost

Example Historical Gain

William acquired an asset for R100 on 1 Oct 1998.

On 1 Oct 2001 the MV is R160.

On 1 May 2005 he sold asset for a proceeds of R130.

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Kink test

MV 160

100 1.10.2001 Date disposed • Historical gain

• MV selected as VDV, but MV exceeds proceeds

• MV replaced as VDV by proceeds less post-VD expenditure • Therefore 130 – 130 = zero

130 proceeds

160

100 130

See page 158 of SARS Guide

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Time Apportionment Base Cost (Par 30)

1 Pre + post period

Proceeds – Pre exp x

Pre period Pre Exp +

= TABC

Two possibilities

1. All expenditure incurred BEFORE valuation date

NOTE: In this formula the pre-period may not exceed 20 if the

expenditure was incurred in more than one year of assessment prior to

valuation date.

Part of year treated as full year.

See page 183 of SARS Guide

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Time Apportionment Base Cost (Par 30)

2. Portion of expenditure incurred AFTER valuation date

The same formula as above except that proceeds to be used in formula as follows:

Total expenditure Pre expenditure x

Actual proceeds =

Proceeds

Two possibilities

In Scenario 1 “N” (the pre-period) is limited to maximum 20 yrs if pre-VD expenditure incurred in more than one year of

assessment prior to VD

Expenditure Expenditure

Scenario 2 VD All expenditure here

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TABC example 1 (all expenditure before VD)

A person acquired an asset on 1 Oct 1996 (5 years before VD)He disposed thereof on 1 Oct 2005 (4 years after VD) for R200 000All the allowable expenditure of R40 000 was incurred prior to

valuation date

5 years R40 000

Expenditure

1996 Õ Total 9 years Ö 2005

1 Oct 2001

4 years R200 000

P

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TABC example 1 cont’d

Pre + post period

Proceeds – Pre exp x

Pre period Pre Exp +

= TABC

5 + 4

(200 000 – 40 000) x

5 40 000 +

= TABC

9

160 000 x

5 40 000 +

= TABC

= R128 889

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TABC example 2 (expenditure before and after VD)

Paul acquired an asset on 1 Oct 1983 (18 years before VD)

He disposes thereof on 1 Oct 2005 (4 years after VD) for R200 000. The allowable expenditure was incurred as follows:

oR30 000 on 1 Oct 1983 oR20 000 on 1 Aug 2002

18 years R30 000 pre-exp

Å Total 22 years Æ 1 Oct 2001

4 years R20 000 post-exp

Proceeds 200 000

NB. A fraction of a year is taken as a full year.

TABC example 2 cont’d

The same method applies with the exception that the proceeds taken into account for purpose of formula must be determined as follows:

Total (post and pre) exp Pre expenditure ×

Proceeds =

P

50 000 30 000 ×

200 000 =

P

120 000 =

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TABC example 2 cont’d

Pre + post period

Proceeds – Pre exp x

Pre period Pre Exp +

= TABC

18 + 4 x (120 000 – 30 000) 18

30 000 + = TABC 22 90 000 x 18 30 000 +

= TABC

= R103 636

Total base cost = R103 636 + 20 000 = R123 636

Capital gain if the TABC is selected, is R76 364 (200 000 – 123 636)

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Historical loss

B A

Pre VD exp do NOT

exceeds or = proceeds AND

exceeds MV on 1.10.2001

Then VDV is LOWER of:

MV (on 1.10.2001), or

TABC (always TABC)

VDV = TABC Pre VD expenditure

exceeds or = proceeds AND

exceeds MV on 1.10.2001

Then the VDV is HIGHER of:

MV (on 1.10.2001), and

Proceeds minus post-exp

MV not determined on VD(or not in Gazette)

MV Determined on VD(two possibilities) Proceeds do NOT exceed expenditure

See para 8.21.1 on page 160 of SARS Guide

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Example (Pre VD Shares Sold)

Taxpayer makes economic profit (proceeds exceed expenditure)Share acquired on 1 10.2000 for R120

MV on 1.10.2001 (Gazette) is R100Proceeds on sale 1.10.2005 is R250

R146 =

1 5

250 – 120 x

1 120 + =

3) TABC

R50, or =

2) 20% (R250 – 0)

R100, or =

1) MV

Example (Pre VD Shares Sold)

104 250

150 Capital gain

146 50

100 Less: Base cost

250 250

250 Proceeds

TABC 20% Proceeds

MV

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Pre-valuation date expenditure cannot be

determined

Where the pre-valuation date expenditure cannot be established by the taxpayer or SARS the VDV will be

– The MV on VD, or

– 20% of (proceeds minus post-VD expenditure) (taxpayer can select)

See page 149 of SARS Guide

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Identical Assets (par 32)

Identical assets” is defined as a group of similar assets which –

is not able to be individually distinguished apart from any identifying numbers, which it may bear.

(b)

if any one of them was disposed of, would realise the same amount regardless of which of them was disposed of; and

(a)

See para 8.26 on page 149 of SARS Guide

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“Holding” of identical assets

• The following are separate holdings of

identical assets

• All A class shares in Elle Ltd

• All B class shares in Elle Ltd

• All 12% preference shares in Elle Ltd

• All 10% preference shares in Elle Ltd

Identical Assets (par 32)

Three methods

1. Specific identification SPID (any identical asset) 2. First in first out FIFO (any identical asset)

3. Weighted average WABC (only for)

The weighted average method may only be used for – listed financial instruments

– interests in collective investment schemes – coins made mainly of gold or platinum – section 24 J instruments

See para 8.26.2 on page 200 of SARS Guide

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Identical Assets (par 32)

3

• If WABC is selected for any identical asset in any of the 4 items listed above it must be used for all assets in that item.

Example. Jon only buys listed shares. On VD he had 100 ABC Ltd shares. Then bought 500 ABC Ltd in 2002. In 2003 sold 300 ABC Ltd shares and used WABC.

In 2004 he bought 200 XYZ Ltd shares. • Can only use different method once entire

holding of listed shares have been sold.

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Specific Identification - example

John holds the following units in a collective investment scheme

620 400

135 1.35

100 1/01/2002

255 1.70

150 1/12/2001

80 1.60

50 1/11/2001

150 1.50

100 1/10/2001

Cost Cost per

unit Units

Date purchased

On 28.2.2002 John sold 125 units

His records show that he sold 50 of the units acquired on 1/11/2001 and 75 of the units acquired on 1/12/2001

50

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SPID continued

The base cost of the 125 units sold is: 50 × R1.60 = R80.00

75 × R1.70 = R127.50

Base cost R207.50

First in First Out

With this method it is assumed that the oldest units are sold first. The 125 units sold will be

R190.00 Base cost

40.00 Bought on 1/11/2001 at R1.60

25

R150.00 Bought on 1/10/2001 at R1.50

100

620 400

135 1.35

100 1/01/2001

255 1.70

150 1/12/2001

80 1.60

50 1/11/2001

150 1.50

100 1/10/2001

Cost Cost per unit

Units Date purchased

100 25

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Weighted Average Base Cost (par 32)

420.00 2.80

Units bought on 31/01/2002 150

3 979.26 Base cost of total units

1 450

720.00 3.60

Units bought on 1/08/2002 200

3 259.26 Remaining BC (R3 520 – R260.74)

1 250

59.26 CAPITAL GAIN

260.74

Less: WABC (3 520 ÷ 1 350) x 100

320.00 3.20

Sold on 1/07/2002 (proceeds) (-100)

3 520.00 Base cost of total units

1 350

600.00 3.00

Units bought on 15/03/2002 200

2 500.00 2.50

Units in CIS on 1/10/2001 1 000

See para 8.26.2.3 on page 201 SARS Guide

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WABC (par 32)

3 979.26 Brought forward

1 450

3 293.18 Remaining BC (3 979.26 – 686.08)

1 200

1 866.82 CAPITAL GAIN

3 293.18

Less: WABC (3 293.18 ÷ 1 200) x 1 200

5 160.00 4.30

Units sold on 1/10/2002 (-1 200)

313.92 CAPITAL GAIN

686.08

Less: WABC (3 979.26 ÷1 450) x 250

1 000 4.00

Sold on 1/09/2002 (proceeds) (-250)

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Comparison

R360-00 300 R140-00 1-40 1.10.99 100 R120-00 1-20 1.10.98 100 R100-00 1-00 1.10.97 100 Expen CPU Date Units

Market value on 1.10.01 as per Gazette is R1-20 per unit After 1 October 2001 he sells the following units (SPID).

R120 1-20 100 1.10.2004 R125 1-25 100 1.10.2003 R115 1-15 100 1.10.2002 Total proceeds Unit proc Units sold Date sold

SPID

R120 1-20

100 acquired 1.10.1997 1.10.2004

R125 1-25

100 acquired 1.10.1998 1.10.2003

R115 1-15

100 acquired 1.10.1999 1.10.2002 Total proceeds Unit proceeds Units sold Date sold

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SPID summary

Loss of R3.00

Total gain/loss 0 2.00 (5.00) Capital gain 120.00 123.00 120.00 Less BC 120.00 125.00 115.00 Proceeds 115.00 Pro- Pre E

111.43 123.00

TABC

24.00 25.00

20% of P

120.00 120.00

120.00 MV on VD

1.10.2004 1.10.2003 1.10.2002 Historical loss 42

FIFO

R120 1-20

100 acquired 1.10.1999 1.10.2004

R125 1-25

100 acquired 1.10.1998 1.10.2003

R115 1-15

100 acquired 1.10.1997 1.10.2002 Total proceeds Unit proceeds Units sold Date sold

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FIFO summary

3

Gain of R2.00

Total gain/loss 0 2.00 0 Capital gain 120.00 123.00 115.00 Less BC 120.00 125.00 115.00 Proceeds 120.00 Pro- Pre E

123.00 112.00

TABC

25.00 23.00

20% of P

120.00 120.00

115.00 MV on VD

1.10.2004 1.10.2003

1.10.2002

120 MV replaced

by Proceeds 115 Historical loss

WABC summary

3

No capital gain

0 5.00 (5.00) 120.00 120.00 120.00 WABC (360 ÷ 300 ×100)

120.00 125.00 115.00 Proceeds 1.10.2004 1.10.2003 1.10.2002

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Final comparison

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Best 0 R2.00 (R3.00) Gain/loss WABC FIFO SPID 46

Post VD acquisitions

R90 Total capital gain

R50 R160 R1,60 (02) 100 2007 R30 R150 R1,50 (03) 100 2006 R10 R140 R1,40 (04) 100 2005

Sold and used SPID SP Proc C/gain R1,30 R1.30 100 2004 R1,20 R1,20 100 2003 R1,10 R1,10 100 2002 CPU Num Date

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Post VD acquisitions

R90 Total capital gain

R40 120 R160 100 2007 R30 120 R150 100 2006 R20 120 R140 100 2005

Sold and used WABC Proc WABC C/gain R90 Total capital gain

R30 R160 R1,60 (04) 100 2007 R30 R150 R1,50 (03) 100 2006 R30 R140 R1,40 (02) 100 2005

Sold and used FIFO SP Proc C/gain

PV of Gains

R83,90 R85,00

R82,80 PV at 6%

40 30 50 2007 30 30 30 2006 20 30 10 2005 WABC FIFO SPID

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Life insurance

If long-term policy is disposed of by the “original beneficial owner” the capital gain is disregarded.

No exclusion in respect of disposal of long-term policy with foreign insurers

See para 12.4 on page 288 of SARS Guide

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When exempt

Payable to original beneficial owner.

If not payable to original beneficial owner also exempt if payable to

provided no amount paid in respect of cession of the policy.

dependant as per Pension Funds Act;

nominee

spouse

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Example

John cedes a policy that he owns to Carl during his lifetime. John dies and the policy pays to Carl. Carl is not the original beneficial owner. He is not a nominee.

Nominee refers to situation where the insured remains the original beneficial owner. Carl is cessionary – not nominee.

Example

Vincent effects a policy on his own life and then cedes it to Barry.

After a few years Barry cedes the policy back to Vincent.

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Policy to former spouse

Marital like union, agreement of division made an order of court.

Divorce order

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Employee/director exclusion

Applies in respect of keyman and deferred

compensation policies ceded to employee/director. disregarded

premiums paid by employer were deducted under section 11(w)

that person’s life was insured under the policy

was employee or director

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Income tax position

On leaving of service and cession of policy, the value of policy included in employees gross income.

Value so included forms base cost when policy pays out or is ceded.

The gain must be disregarded.

Buy-and-sell policies

A and B are partners and effect policies on each other’s lives in terms of a buy-and-sell agreement.

A dies. The policy on his life pays to B. The gain is exempt.

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Policies ceded to life insured

The business comes to an end. Partnership is dissolved.

Policies ceded to life insured.

Gain exempt provided life insured paid no premiums where policy was owned by other partner.

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Group life policies

Where employee pays all the premiums under a group life policy and that employee or his or her nominees are the beneficiaries under the policy, it is accepted that the employee is the beneficial owner of the policy.

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CGT on second-hand policies

commencement of residence [p12(4)]

cessation of residence [p12(1)(1)]

death [p40]

donation [p11(1)(a)]

withdrawal (whole or part) [p11(1)(b) and 33]

surrender [p11(1)(b)]

maturity [p11(1)(b)]

cession [p11(1)(a)]

When is there a disposal?

Guaranteed capital fund

Every withdrawal triggers a disposal.

With every withdrawal it is necessary to determine capital gain or loss.

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Part Disposals

MV of entire asset x Base cost entire asset MV of part disposed

= Pro rata BC

Tony buys an endowment policy from Ian (the original owner) for an amount of R500 000 on 1 Oct 2005.

The policy is five years old and paid-up.

As from 1 March 2006 Tony starts taking six-monthly withdrawals.

The first withdrawal is on 1 March 2006.

His capital gains in respect of this policy for the tax year 2007 will be as follows:

See para 8.27.1 on page 206 SARS Guide

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Part Disposals

First withdrawal (1 March 2006)

The remainder of base cost to carry forward is R478 469 (R500 000 – R21 531)

R969 =

21 531 –

22 500 =

base cost –

Proceeds =

Capital gain

21 531 =

522 500 x 500 000 22 500

= Pro rata base cost

R 22 500 =

Withdrawal

R500 000 =

Total base cost

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Part Disposals

Second withdrawal (1 September 2006)

The remainder of base cost to carry forward is R457 865 (R478 469 – R20 604)

R1 896 =

20 604 –

22 500 =

base cost –

Proceeds =

Capital gain

20 604 =

522 500 x 478 469 22 500

= Pro rata base cost

R 22 500 =

Withdrawal

R478 469 =

Total base cost

MV of policy before secondwithdrawal is R522 500

Part Disposals

An amount of R2 838 will be taken into account in respect of the policy when calculating his aggregate capital gain for the year

2 838 Total

1 869 Capital gain withdrawal 2

969 Capital gain withdrawal 1

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CGT on death

the estate of the deceased person (separate taxable entity)

the deceased person in the year of his death

On the death of a person there are CGT consequences for

See para 16.1 page 367 of SARS Guide

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For the deceased

Assessed for period 1 March to date of death.

Deemed to have disposed of his/her assets to his/her deceased estate for proceeds equal to market value – with 4 exceptions.

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Exceptions

1. assets transferred to surviving spouse [p67(2)(a) roll-over]

2. assets bequeathed to PBO

3. long-term insurance the proceeds of which, if it had been received by the deceased would have been exempt

4. pension fund, provident fund and RA benefits.

Annual exclusion

R60 000 – for deceased in year of death.

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The estate [par 40(1)]

Deemed to have acquired the assets from the deceased at a cost equal to market value.

Assets disposed of by the executor can be divided into two categories disposals

1. to heirs, legatees or trustee of a trust

2. assets disposed of to third parties.

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Disposals to heirs etc

Treated as a disposal for proceeds equal to BC of the deceased estate.

Transfer of assets to surviving spouse or PBO is not a disposal.

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Assets disposed of by executor to

third parties

Estate liable for CGT.

Estate to be treated in the same manner as the deceased would have been treated. Therefore 25% inclusion rate.

R12 500 exclusion in the year it comes into existence.

Primary residence – 2 years.

SARS Example

900 000 600 000

Listed shares

300 000 200 000

2ndHand endowment pol

150 000 100 000

Endowment policy

200 000 300 000

Yacht (11m in length)

800 000 500 000

Household furniture

350 000 250 000

Holiday home

2 100 000 1 000 000

Primary residence

Market value Base cost

Facts: Richard Spectre died on 31 August 2005 leaving the following assets:

See page 373 SARS Guide

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Example continued

The remaining assets were to be sold and the proceeds split between his wife and son

The second-hand policy is to be left to Retina South Africa, a registered PBO

The endowment policy is to be left to his son

The holiday home is to be left to his surviving spouse

In his will he stipulated that

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Example continued

400 000 300 000 0 300 000 900 000 600 000 L/shares 0 (100 000) 100 000 300 000 200 000 2ndh End

0 (50 000) 50 000 150 000 100 000 Endow 0 100 000 (100 000) 200 000 300 000 Yacht 0 (300 000) 300 000 800 000 500 000 Furniture 0 (100 000) 100 000 350 000 250 000 Hol home 100 000 (1 000 000)

1 100 000 2 100 000

1 000 000 Prim res Total Excl R/o Cap Gain/loss MV Base cost Asset

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Example continued

87 500 Taxable capital gain (0.25 × 350 000)

350 000 Aggregate capital gain

50 000 Less: Annual exclusion

400 000 Sum of capital gains and losses

Liability of estate

Facts: The saga continues. After Richard had passed away his executor, Argie Bargie, proceeded to realise the assets that had not been bequeathed to specific persons. These assets realised the following proceeds:

In order to realise a better price for the yacht Argie Bargie had the navigation equipment upgraded at a cost of R5 000

960 000 Listed shares

220 000 Yacht

850 000 Furniture and effects

2 300 000 Primary residence

2007 2006

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continued

60 000 900 000

960 000 Listed shares

50 000 800 000

850 000 Furniture

Cap gain Base cost

Proceeds

Result: The taxable capital gain of Richard’s estate

will be determined as follows:

2006

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continued

12 500 Taxable cap gain (0,25 of R50 000)

50 000 Aggregate capital gain

10 000 Less: Annual exclusion

60 000 Capital gain

Since the household furniture and effects are personal use assets that would have been exempt in Richard’s hands, the gain in his estate will also be disregarded. The estate will be liable for CGT on the listed shares,

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continued

15 000 205 000

220 000 Yacht

200 000 2 100 000

2 300 000 Primary residence

Cap gain Base cost

Proceeds

2007

The gain on the disposal of the primary residence must be disregarded as it is covered by the

primary residence exclusion of R1 million

Continued

The base cost of the yacht is its market value on Richard’s death (R200 000) plus the R5 000 spent on upgrading it. The taxable capital gain on disposal of the yacht is calculated as follows:

625 Taxable cap gain (0,25 of R2 500)

2 500 Aggregate capital gain

12 500 Less: Annual exclusion

15 000 Capital gain

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Tax Calculation Average rate

R39 525 Tax as per tables on R181 750

181 750 “Taxable income”

8 250 Less: Pension fund contributions

190 000 80 000 Pension

110 000 Salary

Step 1: Calculate the tax by first ignoring the taxable lump sum and the taxable capital gain

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Tax Calculation, Continued

R56 612 Tax on R221 750 (2007)

221 750 40 000 Plus: Taxable capital gain

181 750 “Taxable income” as per step 1

Step 3: Calculate tax on “other income”

R47 400 23.7% of R200 000 =

Step 2: Calculate the tax attracted by the taxable lump sum.

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Tax Calculation, Continued

96 812 Total tax payable

7 200 Less: Rebate

104 012 Total

R56 612 Plus: Tax on “other income”

R47 400 Tax on lump sum

Figure

TABC example 1 cont’d

TABC example

1 cont’d p.11
TABC example 1 (all expenditure before VD)

TABC example

1 (all expenditure before VD) p.11
TABC example 2 cont’d

TABC example

2 cont’d p.12
TABC example 2 (expenditure before and after VD)

TABC example

2 (expenditure before and after VD) p.12
TABC example 2 cont’d

TABC example

2 cont’d p.13
TABC is best option in example (smallest gain)

TABC is

best option in example (smallest gain) p.14

References