Unit 2.4 Taxable Capital Gains or Losses (15) Flashcards
What are capital gains or losses
Capital gains or losses are the taxable profits or losses from the sale of assets that were not bought for the purpose of making a profit, ie. not for speculative purposes
Capital gains tax was introduced
October 2001
Prior to this date capital gains were specifically excluded from the definition of gross income and no tax was payable on capital gains.
After introduction of capital gains tax
Capital gains was still excluded from gross income but specifically included in taxable income after deductions
The rate at which they are included is known as the
Inclusion rate, currently this rate for
* individuals and special trusts is 40%
* Other taxpayers is 80%
The taxable capital gain to be included in taxable income or the taxable capital loss to be carried forward to next year is calculated as follows:
- Establish all disposals and deemed disposals of capital assets during the year
- Calculate the capital gain or loss on each disposal, ie. Proceeds less base cost
- Add together all capital gains and losses to arrive at either
- Aggregate capital gain, or
- Aggregate capital loss
In case of aggregate capital gain
Aggregate capital gain
LESS: Annual exclusion (only individuals and special trusts are entitled, R20 000)
LESS: Assessed capital loss
= Net capital gain
X Inclusion rate
= Taxable capital gain (included in taxable income)
In case of aggregate capital loss
Aggregate capital loss
LESS: Annual exclusion
PLUS: Prior year assessed capital loss
= Assessed capital loss (to be carried forward)
An assessed capital loss cannot
Reduce taxable income
It can only reduce future capital gains
The base cost of an asset is calculated differently depending on the
Date of acquisition or purchase of the capital asset
Base cost of an asset acquired on or after introduction of capital gains tax (1 October 2001) is calculated by:
Adding the following costs
- Purchase price of asset
- The valuation costs for the purpose of determining the capital gain or loss on the disposal
- Certain costs of acquiring or disposing of the asset. These include professional fees such as estate agent fees, transfer costs, stamp duty, advertising costs, asset moving costs, installation costs, and a portion of donations tax payable.
- The expenses incurred in defending the legal title of the asset
- Improvements or enhancements to the asset
The following costs are specifically excluded from the base cost of the asset:
- Borrowing costs or raising fees
- Repairs, maintenance, protection, insurance, rates and taxes or similar expenses.
The base cost of an asset acquired before introduction of capital gains tax (October 2001) is calculated as follows:
Base cost
= Valuation date value
PLUS Post 1/10/2001 expenditure
The valuation date value is calculated in one of three ways
- The market value on the 1st October 2001
- The time apportionment base cost
- 20% of disposal proceeds
If an individual tax payer sells his primary residence, they are entitled to the following primary residence exclusions:
- The full capital gain is excluded if the primary residence is sold for R 2 million or less
- A primary exclusion of R 2 million, if the proceeds exceed R 2 million
There are three situations in which the primary residence of R 2 million is limited, these are:
- Where the individual is absent from his home for a period after 1 October 2001.
This limit = capital gain x period present / total period - Where the individual uses a portion of his home as an office
This limit = capital gain X % home used as an office - Where the primary residence exceeds two hectares of land
This limit = capital gain X proceeds due to the land / total proceeds X excess land / total land
