Capital gains tax (CGT) is littered with pitfalls, which could see you paying more tax than required, warns Godfrey Shev, the tax consulting partner of accounting company Grant Thornton Kessel Feinstein.
Shev was speaking at the Franklin Templeton NIB/Personal Finance Investors Club meeting held in Cape Town recently.
He says the biggest unresolved problem is differentiating between what is revenue subject to income tax and what is a capital gain. If money you make is not taxed as revenue, it will now be taxed as a capital gain.
And while you did not previously have to declare the capital gains you made, you now have to do so. And the Receiver of Revenue could make the call on what it is revenue and what constitutes a capital gain.
Shev says there are a number of areas in which you must exercise caution. These include:
Calculating Base cost
Shev expects that many people will pay additional tax because they will not get the base cost correct. The higher the base cost, the lower the potential capital gain.
The base cost is made up of:
- The cost of acquisition;
- Costs such as transfer costs, stamp duty, advertising, professional fees (accountants, lawyers, valuers, brokers) and option costs;
- Improvements and additions;
- Limited claims for borrowing costs (one third of interest cost on borrowings to invest in shares and unit trusts listed locally); and
- Limited claims for repairs and maintenance (for example, to put a property into shape for letting but not for on-going maintenance).
For the base cost on assets held before October 1 the base cost is:
- The market value;
- 20 percent of proceeds. That is, 80 percent is subject to CGT; or
- Time apportionment. For example, if you owned an asset for five years before October 1 and 10 years afterwards, one third of the value would be the base cost.
Market Value
Shev says deciding the market value is complex. Any asset capable of being sold except for personal use assets acquired before October 1 2001 needs to have a value as at October 1.
For listed local shares and South African unit trusts bought before October 1 the job has been made easier for you because the base values have been set by the taxman.
On all other assets you must set a value. Valuations must be completed by October 1 2003 and lodged with the first tax return you submit after that date (even if the tax return is for an earlier period) if the market value is greater than R10 million or greater than R1 million for intangible assets.
Shev says the R10 million applies to an entire investment portfolio as well as to individual investments.
If the market value is lower at sale than these stipulated amounts then you can submit the base value when the asset is sold.
Shev warns that without proper valuations you may end up paying more tax than you have to.
The base value is defined as the price which could have been obtained on October 1 on a sale between a willing buyer and a willing seller dealing at arm's length in an open market.
There is no requirement in terms of the law as to who can value an asset but Shev warns that the SA Revenue Service can be expected to challenge valuations. You will need sufficient evidence to support the valuation.
Valuations will need to stand the tests of independence, expertise (be sure that your estate agent is properly qualified to provide a value on property in your area) and credibility.
Shev says you must properly document the valuation, with the reasons and supporting evidence.
This documentation should be done now, rather than left for later when your circumstances may have changed or supporting evidence could have been lost.
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