Determining a taxable capital gain or an assessed capital loss: some problems

L Olivier
Department of Accounting
University of Johannesburg

Abstract
Despite the South African legislature’s intention to introduce capital gains tax (CGT)
as a simple and clear tax, it is an extremely complex tax. Several provisions of both
the Eighth Schedule to the Income Tax Act 58 of 1962 and the Act itself have to be
taken into account in determining whether a taxable capital gain or an assessed capital
loss has arisen during the year of assessment. The application of these principles is
often surrounded by uncertainty. Hence, the purpose of this article is not only to
provide an overview of some of the different provisions that have to be taken into
account and the interaction between them, but also to highlight some of the problems
arising from the application of the principles themselves.

Key words
Assessed capital loss Interpretation of capital gains tax
Base cost legislation
Capital gain/loss Meaning of ‘proceeds’ for CGT-purposes
Capital gains tax Net capital gain
Capital gains tax building blocks Proceeds
Consecutive disposals Taxable capital gain
Inclusion of rights and assets for capital Unaccrued amounts – paragraph 39A
gains tax purposes Unquantified amounts – section 24M

1 Introduction
The intention of the legislature in introducing capital gains tax (‘CGT’) with effect from 1
October 2001 was to introduce simple and clear, yet technically correct provisions
(McAllister 2005:51). However, CGT is internationally known to be an extremely complex
tax. Although the Eighth Schedule to the Income Tax Act 58 of 1962 (‘the Act’) (South
Africa 1962), containing the provisions relating to CGT has been in operation for just over
five years, these provisions have proven to be extremely complex and often difficult to
apply in practice. The problem is exacerbated by the fact that, as it is a new tax, not much
guidance can be obtained from domestic court decisions. In addition, the South African
Revenue Service (SARS) is often not in a position to provide guidance on its own
interpretation and application of complex practical issues, as it does not yet have a standard
practice with regard to CGT. SARS (McAllister 2005) has produced a comprehensive CGT Guide and made it freely available on its website (www.sars.gov.za), but it is obviously
impossible to address all the practical issues in this Guide.

Even the basic exercise of determining a taxpayer’s taxable capital gain or assessed
capital loss is often very complicated, because several different provisions have to be
taken into account. As these provisions are not all contained in the Eighth Schedule,
it is often easy to overlook one or more of the provisions, with significant financial
implications for taxpayers. The purpose of this article is not only to highlight some of the
different provisions that have to be taken into account in determining a capital gain or
capital loss, but also to address some of the complicated and intricate problems that may
arise in doing so.

In order for CGT to be levied, the presence of four so-called ‘building blocks’ is
presupposed, namely the disposal of an asset for proceeds that exceed its base cost. All
four building blocks must be present before a taxpayer has to account for CGT. To
determine whether a taxpayer has to account for a capital gain or a capital loss, several
steps have to be followed. Firstly, the capital gain or capital loss arising from disposal of
property during the year of assessment has to be determined (paragraphs 3 and 4 of the
Eighth Schedule – unless otherwise indicated, all further references in this article to
paragraphs refer to paragraphs in the Eighth Schedule). Secondly, at the end of the year of
assessment, all the capital gains and losses generated during the year of assessment must be
added together to determine whether a taxpayer has a so-called ‘aggregate capital gain’ or
‘aggregate capital loss’ (paragraphs 6 and 7). Thirdly, any assessed capital loss from a
previous year must be taken into account (paragraph 9). This may show that a taxpayer has
either a net capital gain or an assessed capital loss. The final step is to include in a
taxpayer’s taxable income the percentage of the capital gain that is taxable, or to carry
forward the capital loss (in each case minus the annual exclusion). A taxable capital gain is
included in a taxpayer’s taxable income in terms of section 26A and an assessed capital loss
is carried forward to be offset against capital gains in future years of assessment.

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