For many years big legal battles in the tax world were fought when a distinction was sought between gross income and capital. If the taxpayer could prove that income was capital, then no tax was payable as income of “a capital nature” is specifically excluded from gross income.
Any uncertainty in this regard was thought to have ended with the introduction of capital gains tax (CGT) on 1 October 2001, known as the valuation date. A distinction was created between pre- and post-valuation date assets.
Yet even so, many ingenious taxpayers have found renewed ways to legally avoid CGT. In many cases related to pre-valuation date assets. It is no coincidence that the SARS Comprehensive Guide to CGT comprises a sizeable 1000 pages.
Why Reducing CGT Matters
Reducing CGT liability is prudent as there are huge differences between the CGT payable in different permutations, mainly relating to differing inclusion rates applicable to taxable income. For example, the effective CGT rate on trusts comprises 36%. Yet for an individual it is only 18%.
The Registration Threshold Problem
SARS has been aware of the crippling effect on small businesses for years, but only recently increased the registration threshold from R1m to R2.3m. Many companies are now attempting to deregister from VAT, but additional liabilities may occur as exit VAT is applicable on all assets held by the company.
Ways Taxpayers Reduce CGT
- The most obvious way to minimize CGT is to increase the base cost. Capital gains are payable on the proceeds, minus the base cost. Certain expenses in acquiring the asset may be added to the valuation, thereby reducing the potential CGT liability with a larger base cost.
- In addition, CGT can only be charged on disposals with proceeds, as defined. CGT may potentially be reduced or even excluded if it can be proven that a disposal with proceeds did not occur.
- Claiming assessed losses in companies has also been a favourite method employed by taxpayers to minimize CGT. Also, here SARS has closed many of the loopholes with technical adjustments.
Yet overall successes have been mixed for SARS.
Pre-Valuation Date Assets
The biggest benefits for taxpayers seem to be from pre-valuation date assets, with the time-apportionment base cost (TAB) method resulting in zero CGT becoming payable if the asset bought before 2001 was sold for lower than market value, or expenditure was limited after 2001. That, however, must be proven to SARS, with documentary evidence often lacking. Then a flat 20% CGT may be levied.
Shares can also escape the CGT net, depending on the time held.
Often CGT is not payable due to favourable stipulations in the Eighth Schedule. For example, roll-over provisions for spouses. Then again, attribution rules could be onerous for donors, if assets are shifted to beneficiaries in a tax scheme for the sole objective of minimizing tax.
This article is general information about South African tax and is not tax advice. Tax outcomes depend on the specific facts of each matter. See our Website Terms of Use for more.
Can Capital Gains Tax Be Avoided?
Base cost, valuation date rules, and exclusions can make a substantial difference to what you owe but only if they’re applied before the disposal, not after.