The South African Revenue Service (SARS) has warned taxpayers to give careful consideration to the method they use to determine the value of identical assets for capital gains tax (CGT) purposes.
This applies to identical assets you held before October 1, 2001. There are three classes of identical assets. Very broadly, they are: listed shares; unit trusts; and gold and platinum coins.
In order to determine the capital gain you have made on assets you held before October 1, 2001 - when CGT was implemented - you have to work out the base cost, or value, of those assets on that date. You can use one of four methods to do this:
- The market value of the assets as at October 1, 2001;
- The time apportionment method. You work out the total gain since you bought the asset and apportion that gain over the number of years you have owned the asset. You then use this average annual gain to work out the gain since October 1, 2001;
- You can declare 20 percent of proceeds of the sale of the asset as the base cost; or
- You can use the weighted average on October 1, 2001.
There are advantages and disadvantages, both in terms of the tax you will pay and the administration you need to do, in using each method.
SARS has pointed out that if you choose to use the weighted average method, you must use that method for all the assets you own in that class of identical assets, until you have disposed of all those assets. This means that even if you own units in more than one fund, if you choose to make use of the weighted average method, you must use this method to value units you hold in all of those funds.
If you do not choose the weighted average method, however, you can switch between methods.
SARS has also pointed out that the profit/loss limitation rules do not apply if you choose the weighted average method. The profit/loss limitation rule was introduced to avoid the possibility of taxpayers being liable for tax on a phantom loss or gain. This would happen if, for example, your shares have gained in value since October 1, 2001, but you had, in fact, sold them at a real loss - that is, for less than what you bought them for prior to October 1. According to this rule, your gain or loss for CGT purposes would be zero.
You can use the profit/loss limitation rule if you value your assets using the market value or time apportionment methods, but not if you use the weighted average method.
Portfolio administrators have to report shares or unit trusts sold on behalf of their clients to SARS. These reports will be based on the weighted average method, and taxpayers will receive copies of the reports (IT3(C)).
You do not, however, have to use these reports to determine the value of your capital gain or loss on share or unit trust transactions.
- In our features on how to fill in your tax return, SARS has said the exchange rates you need to convert foreign assets into rands were available on its website ( www.sars.gov.za). Some readers have had difficulty finding these rates. SARS says they are in the site's "ecommerce" section, but you need a browser with 128-bit encryption, the highest level of protection for internet communications.
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