Deloitte & Touche Tax Technologies has developed a capital gains calculator that could save you money and hours of laborious calculation.
Capcalc is a web-based calculator that calculates your capital gain or loss - using the most tax advantageous method - in a matter of seconds, and therefore minimises the amount of capital gains tax (CGT) you may need to pay.
Peter Harrison, an associate director of Deloitte & Touche, says that to determine the capital gain you have made on assets acquired before October 1 last year - when CGT was introduced - you need to subtract the base cost of the asset on October 1, 2001 from the proceeds of the sale or disposal of the asset.
When you make a gain on disposal of an asset, the law allows you to use one of three methods to determine the base cost:
- You can use the market value of the asset as at October 1, 2001;
- You can use the time apportionment method. You divide the total gain you made on the asset (from the time you bought it until you sell it) by the number of years you have owned the asset, and then multiply this annual gain by the number of years you have held the asset since October 1, 2001; or
- You can declare 20 percent of the proceeds of the sale as your base cost.
The method you use can make a significant difference to the value of your gain and hence the tax you pay, Harrison says.
For example, suppose you bought 100 shares in Anglogold in September 2001, when the price was R282 a share. The published price on October 1, 2001 was R285.44. In July 2002, when the shares are quoted at R552, you sell them. Here is how the size of your gain differs when you use the market value and the time-apportionment methods to determine the base cost:
- Market value method:
Proceeds: 100 x R552 = R55 200
Less base cost: 100 x R285.44 = R28 544
Gain: R55 200 - R28 544 = R26 656
- Time apportionment method:
Proceeds: 100 x R552 = R55 200
Less base cost: 100 x R282 = R28 200
Gain: R55 200 - R28 200 = R27 000
Divide by the number of years owned*:
R27 000 O 2 = R13 500
Multiply by the number of years owned after October 1, 2001: R13 500 x 1 = R13 500
(* Part years count as full years)
- Twenty percent method:
Proceeds: 100 x R552 = R55 200
Less base cost: 20% x R55 200 = R11 040
Gain: R55 200 - R11 040 = R44 160
In this example, using the time-apportionment method halves your gain and hence your tax bill.
Although the calculations look easy and you may think you can do them quickly on the back of an envelope, the calculations are not all that simple in practice.
Capcalc, which caters for about 95 percent of all capital gain scenarios, makes light of these calculations. It will, for example, work out your gain when you have spent money on improving your asset (for example, adding a swimming pool to your holiday home), when your asset is depreciable, or when you have sold part of it at one stage and the rest at another (for example, if you sub-divide land).
The calculator also automatically takes into account the values, as published by the South African Revenue Service, of listed financial instruments (such as shares, bonds, warrants and unit trusts) as at October 1, 2001.
Michael Cox, the manager of research and development at Deloitte & Touche Tax Technologies, says the calculator can also help you to decide which method is most advantageous to use when you dispose of some "identical assets", such as units in a unit trust fund.
If, for example, you bought units in the fund on three different occasions and paid three different prices for them, and now plan to sell half of them, you need to know which method you should use to determine the base costs of these units.
And you need to be careful about which method you choose, because you will have to use the same method when you dispose of the rest of the units at a later stage.
You can choose one of three methods to calculate the base cost of identical assets:
- You can use what is known as the weighted average price of those assets as the base cost; or
- You can use the first-in-first-out rule - you sell the units in the order you bought them and apply the appropriate base cost; or
- You can identify which ones you are selling and make use of the appropriate base cost.
The calculator can help you to identify the most tax-friendly method.
The calculator is available at www.dttt.co.za and it costs R114 for each calculation. Harrison says this cost should be considered in light of the fact that such a calculation could take a tax consultant a few hours and result in a bill of R3 000 or R4 000.
Cox says Deloitte & Touche does not store any information you enter into the calculator. This means, however, that you must print out or email the results of your calculation, or you will lose this information once you close the web page.
Cox says you should also bear in mind that the calculator only calculates your gain or loss, not the tax you will pay. It does not therefore take into account the fact that each year you are excluded from paying tax on the first R10 000 of your gain, or that you may have a capital loss from the previous year to write off against your gain.
It will also not tell you which assets are excluded from CGT or take account of the fact that the first R1 million you make on your primary residence is exempt from CGT.
But it can be very useful in helping you decide on the timing of the disposal of your assets and which method to use to determine the base cost.
Cox says if you have an idea of the value of your asset, you can use this estimation to determine whether the valuation method is best for you, or whether one of the other methods is more favourable.
Once you know this, you will be able to decide whether or not to have your asset valued by professionals.
Wendy Smith, a partner at Deloitte & Touch, says you should remember that in terms of the law dealing with CGT, if you want to use the valuation method, you must obtain a valuation of your asset as at October 1, 2001, before September 30, 2003. In other words, within the next year. If you have many assets or complicated ones, such as copyrights or trademarks, don't leave the valuation until it is too late, Smith warns.