The value of an asset on October 1, 2001, when capital gains tax was introduced, is of central importance in quantifying gains, writes Peter Harrison, the associate director of taxation services at Deloitte & Touche.
One of the fundamental principles of capital gains tax (CGT) is that, when disposing of an asset, that part of the capital gain made before CGT was introduced on October 1 last year is tax-exempt. The exemption can be calculated in two ways: the time-apportioned method, or the valuation date method.
With the time-apportioned method, the whole gain is apportioned to periods before and after October 1, 2001. With the valuation date method, the value of the asset on October 1, 2001 is compared with the proceeds from its disposal.
The value of an asset on October 1, 2001 is thus of central importance in quantifying gains. The value of an asset on this date will decline in significance over the years as pre-valuation date assets form a smaller part of the population of capital assets. But it is probably the most important CGT issue for the next year or so.
If that is so, why are relatively few taxpayers who held capital assets on the October 1, 2001 giving the issue the attention it demands?
The law clearly stipulates that all valuations must be made by September 30, 2003, or the opportunity to use the valuation basis to calculate gains is lost and the time-apportioned basis will have to be used.
The following simple example illustrates the point: Mr A bought an asset for R100 on October 1, 1996 and sold it for R1 000 on September 30, 2003. It was valued at R900 on October 1, 2001, so most of the increase in value occurred prior to the introduction of CGT.
The gain using the valuation date method is R100 (R1 000 - R900 = R100). But if the time-apportionment method is used, the overall gain of R900 is split (five years before CGT, and two years after) into an exempt R643 and a chargeable R257.
Failure to use the valuation date method would therefore cost Mr A what could be a significant amount of money.
The South African Revenue Service (SARS) has published the values of South African listed shares, bonds and unit trusts that everyone must use if the valuation basis is chosen. But this still leaves an array of assets that potentially need to be valued before September 30, 2003.
Don't expect that if you leave the valuation until next September that you will easily find a professional valuer to do the work for you. You don't have to use a professional; you can do the job yourself, provided you know what you are doing.
If you get it wrong, however, and SARS decides on a different valuation, you lay yourself open to penalties, and a suspect valuation may be just the excuse the SARS needs to investigate your affairs.
If you decide that it would be safer to have your assets valued, you must start by identifying the relevant assets. Some of these are easier to value than others - for example, land and buildings. But what if you own shares in an unlisted company, or shares listed overseas?
If you have built up your own business, what was it worth on the valuation date? You will need to value the fixed property, but what about the goodwill or trade name?
It is probably not worth the effort of valuing items such as plant and machinery, or vehicles, unless you think you might sell them for more than they cost you.
You do, however, need to consider the value of intangible assets. If they cost you nothing, or you wrote off the costs against income, you have no allowable cost if you use the time-apportionment basis to calculate gains. You might, however, be able to justify a valuation on October 1, 2001, which could save you a good deal of money.
A two-year window period was allotted for you to make your valuations as at October 1, 2001. If you have let almost half of that time lapse without doing anything, you need to think seriously about making the effort now. The longer you put it off, the more difficult (and expensive) it will be to make the valuations, and you may end up doing the work yourself. If many valuations are required across a range of assets, you are likely to require professional help.