introduction of capital gains tax · 2019-11-06 · comprehensive guide to capital gains tax (issue...

Comprehensive Guide to Capital Gains Tax (Issue 7)

Income Tax


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TABLE OF CONTENTS Preface .................................................................................................. i Disclaimer ............................................................................................ i Acknowledgments .............................................................................. ii Table of tax court cases .....................................................................iii Table of supreme and high court cases . Error! Bookmark not defined. Main references to paragraphs of the Eighth Schedule ................... x Abbreviations .....................................................................................xii Chapter 1 – Introduction .................................................................... 1

1.1 Reasons for the introduction of CGT ............................................................. 1 1.1.1 International benchmarking ........................................................................... 1 1.1.2 Horizontal equity ........................................................................................... 1 1.1.3 Vertical equity ................................................................................................ 2 1.1.4 The shift from income to capital ..................................................................... 2 1.1.5 Economic efficiency ....................................................................................... 3 1.1.6 Tax-base broadening .................................................................................... 3 1.2 Historical development of CGT in South Africa .............................................. 3 1.2.1 Previous Commissions of Enquiry ................................................................. 3 1.2.2 The Guide – 23 February 2000...................................................................... 4 1.2.3 The First Draft – 12 December 2000 ............................................................. 4 1.2.4 The Second Draft – 2 March 2001 ................................................................. 4 1.2.5 The introduction of CGT into legislation ......................................................... 4 1.2.6 Table of amendments to CGT legislation ....................................................... 5 1.2.7 Retrospective amendments ........................................................................... 8

Chapter 2 – Capital v revenue ...........................................................11 2.1 The words ‘of a capital nature’ ..................................................................... 11 2.2 Allocating receipts and accruals and expenditure between sections of the

Act and the Eighth Schedule ....................................................................... 12 2.3 Double deductions and double taxation ....................................................... 13 2.4 Common law principles ............................................................................... 13 2.4.1 Receipts and accruals ................................................................................. 14 2.4.1.1 Intention ...................................................................................................... 14 2.4.1.1.1 Introduction ................................................................................................. 14 2.4.1.1.2 Change of intention ..................................................................................... 15 2.4.1.1.3 Intention of a company ................................................................................ 15 2.4.1.1.4 Mixed purposes and the dominant purpose ................................................. 16 2.4.1.1.5 Alternative methods ..................................................................................... 16 2.4.1.1.6 Taxpayer’s testimony .................................................................................. 16 2.4.1.1.7 Insufficient funds ......................................................................................... 17 2.4.1.1.8 No return or low return on investment ......................................................... 17 2.4.1.2 Realisation of capital at enhanced value v scheme of profit-making ............ 17 2.4.1.3 Fortuitous nature of the receipt or accrual ................................................... 17 2.4.1.4 The ‘tree and fruit’ analogy .......................................................................... 18 2.4.1.5 Continuity in carrying on business ............................................................... 18 2.4.1.6 The ‘filling a hole’ test .................................................................................. 18 2.4.1.7 No halfway house ........................................................................................ 19 2.4.1.8 Revenue derived from capital productively employed .................................. 19 2.4.1.9 Fixed v floating capital ................................................................................. 19 2.4.1.10 Capital is held with an element of permanency ............................................ 19


2.4.1.11 Length of holding period .............................................................................. 20 2.4.1.12 Realisation soon after acquisition as a result of a new intervening factor .... 20 2.4.1.13 Exchange of asset for shares ...................................................................... 20 2.4.1.14 Conversion of trading stock to capital asset ................................................ 20 2.4.1.15 Realisation to best advantage ..................................................................... 20 2.4.1.16 Conversion of capital asset to trading stock................................................. 21 2.4.1.17 Sale of surplus land ..................................................................................... 21 2.4.1.18 Realisation period ....................................................................................... 21 2.4.1.19 Realisation companies and trusts ................................................................ 21 2.4.1.20 Selling price based on future profits ............................................................ 22 2.4.1.21 Purpose of receipt or accrual ....................................................................... 22 2.4.2 Expenditure ................................................................................................. 23 2.4.2.1 The ‘once and for all’ test ............................................................................ 23 2.4.2.2 The ‘enduring benefit’ test ........................................................................... 23 2.4.2.3 The true nature of the transaction ................................................................ 23 2.4.2.4 Income-earning structure v income-earning operations ............................... 23 2.4.2.5 New asset need not be created ................................................................... 24 2.4.2.6 Protection of capital asset ........................................................................... 24 2.4.3 Specific types of assets ............................................................................... 24 2.4.3.1 Share transactions ...................................................................................... 24 2.4.3.1.1 The ‘for keeps’ test ...................................................................................... 24 2.4.3.1.2 The transaction-by-transaction principle ...................................................... 24 2.4.3.1.3 Main purpose to derive dividend income ..................................................... 24 2.4.3.1.4 Secondary purpose ..................................................................................... 25 2.4.3.1.5 Scope and frequency .................................................................................. 25 2.4.3.1.6 Circumstances in which certain amounts received or accrued from

disposal of shares are deemed to be of a capital nature .............................. 25 2.4.3.2 Krugerrands ................................................................................................ 28 2.4.3.3 Assets acquired by donation or inheritance ................................................. 29 2.4.3.4 Lessors and lessees .................................................................................... 29 2.4.3.4.1 Payments by lessee to lessor ...................................................................... 29 2.4.3.4.2 Payment by lessor to lessee ........................................................................ 29 2.4.3.4.3 Cost of drawing up a lease .......................................................................... 30

Chapter 3 – Design and overview of the core rules ........................31 3.1 Integration into the Income Tax Act ............................................................. 31 3.2 Drafting style ............................................................................................... 31 3.3 Use of other countries’ tax legislation .......................................................... 32 3.4 CGT process flowchart ................................................................................ 33 3.5 Basic steps in determining a taxable capital gain or assessed capital loss .. 33 3.6 Inclusion, statutory and effective CGT rates for the 2018 year of

assessment ................................................................................................. 37 Chapter 4 – The Eighth Schedule – Scope and definitions ............40

4.1 Definitions ................................................................................................... 40 4.1.1 Introduction ................................................................................................. 40 4.1.2 Definition – ‘asset’ ....................................................................................... 41 4.1.2.1 Corporeal property ...................................................................................... 44 4.1.2.2 Incorporeal property .................................................................................... 45 4.1.2.3 Immovable property ..................................................................................... 45 4.1.2.4 Movable property ........................................................................................ 46 4.1.2.5 Rights .......................................................................................................... 46 4.1.2.6 Exclusion of currency .................................................................................. 49 4.1.3 Definition – ‘boat’ ......................................................................................... 51 4.1.4 Definition – ‘pre-valuation date asset’ .......................................................... 51 4.1.5 Definition – ‘recognised exchange’ .............................................................. 51


4.1.6 Definition – ‘ruling price’ .............................................................................. 52 4.1.7 Definition – ‘special trust’ ............................................................................. 53 4.1.8 Definition – ‘valuation date’ .......................................................................... 53 4.1.9 Definition – ‘value shifting arrangement’ ...................................................... 55 4.2 Application to residents and non-residents .................................................. 55 4.3 Source of capital gains and losses .............................................................. 61 4.4 Precedence of sections of the Act over the Eighth Schedule ....................... 63

Chapter 5 – Taxable capital gain and assessed capital loss ..........64 5.1 Capital gain ................................................................................................. 64 5.1.1 Asset disposed of in current year [para 3(a)] ............................................... 64 5.1.2 Asset disposed of in an earlier year [para 3(b)] ........................................... 64 5.1.2.1 Capital gain arising from receipt or accrual of further proceeds

[para 3(b)(i)] ................................................................................................ 65 5.1.2.2 Capital gain arising from recovery or recoupment of base cost

[para 3(b)(ii)]................................................................................................ 65 5.1.2.3 Capital gain arising from a redetermination under para 25(2)

[para 3(b)(iii)] ............................................................................................... 66 5.1.3 Assets reacquired as a result of the cancellation of an agreement in a

subsequent year of assessment [para 3(c)] ................................................. 66 5.1.4 Assets disposed of before valuation date .................................................... 67 5.1.5 Disregarding of capital gains under other provisions ................................... 67 5.2 Capital loss ................................................................................................. 67 5.2.1 Asset disposed of in current year [para 4(a)] ............................................... 67 5.2.2 Asset disposed of in an earlier year [para 4(b)] ........................................... 68 5.2.2.1 Capital loss arising from events affecting proceeds [para 4(b)(i)]................. 68 5.2.2.2 Capital loss arising from incurral of further expenditure [para 4(b)(ii)] .......... 69 5.2.2.3 Capital loss arising from a redetermination under para 25(2) [para 4(b)(iii)] 69 5.2.3 Assets reacquired as a result of the cancellation of an agreement in a

subsequent year of assessment [para 4(c)] ................................................. 69 5.2.4 Assets disposed of before valuation date .................................................... 70 5.2.5 Disregarding of capital losses under other provisions .................................. 70 5.3 Annual exclusion ......................................................................................... 70 5.4 Aggregate capital gain and aggregate capital loss ...................................... 73 5.5 Net capital gain ........................................................................................... 74 5.6 Assessed capital loss .................................................................................. 75 5.7 Taxable capital gain .................................................................................... 75 5.8 Inclusion in taxable income ......................................................................... 76 5.9 Set-off of gains and losses .......................................................................... 76 5.9.1 Set-off of taxable capital gain against assessed loss ................................... 76 5.9.2 Set-off of foreign assessed loss against taxable capital gain ....................... 77 5.9.3 Set-off of foreign capital loss against local capital gain ................................ 78 5.9.4 Set-off of taxable capital gain against ring-fenced assessed loss ................ 79 5.9.5 Set-off of assessed capital loss against taxable income .............................. 79 5.9.6 Set-off of capital gains and losses of controlled foreign companies ............. 80

Chapter 6 – Disposal and acquisition of assets ..............................81 6.1 Disposals .................................................................................................... 81 6.1.1 Disposal events ........................................................................................... 81 6.1.1.1 Forbearance ................................................................................................ 82 6.1.1.2 Conversion .................................................................................................. 82 6.1.1.2.1 Meaning of ‘conversion’ ............................................................................... 82 6.1.1.2.2 Conversions that do not give rise to a capital gain or loss ........................... 82 6.1.1.2.3 Conversions dealt with in para 12 ................................................................ 82 6.1.1.2.4 Convertible preference shares .................................................................... 83 6.1.1.2.5 Convertible debentures ............................................................................... 84


6.1.1.3 Creation ...................................................................................................... 85 6.1.1.4 Variation ...................................................................................................... 85 6.1.1.5 Exchange .................................................................................................... 86 6.1.1.6 Operation of law .......................................................................................... 87 6.1.2 Non-disposal events [para 11(2)] ................................................................. 88 6.1.3 Non-disposals not mentioned in the Eighth Schedule ................................ 100 6.1.3.1 Changes in appointment of executors, curators and administrators ........... 100 6.1.3.2 Conversion of close corporation or co-operative to company under ss 40A

and 40B ..................................................................................................... 101 6.1.3.3 Amalgamation of co-operatives ................................................................. 101 6.1.3.4 Consolidation or subdivision of land and conversion from freehold to

sectional title ............................................................................................. 102 6.1.3.5 Acquisition of shares upon conversion of a non-proprietary exchange ...... 104 6.1.3.6 Switching from one class of a portfolio of a collective investment scheme

to another .................................................................................................. 104 6.1.3.7 Appointment of new contingent beneficiaries by a discretionary trust ........ 105 6.1.3.8 Repudiation of inheritance ......................................................................... 105 6.1.3.9 Listing of a company ................................................................................. 105 6.1.3.10 Transfer of listed shares from one securities exchange to another ............ 106 6.1.3.11 Nominee shareholders .............................................................................. 106 6.1.3.12 Conversion of private company to public company .................................... 106 6.1.3.13 Assets acquired by heirs or legatees ......................................................... 107 6.1.3.14 Shares acquired for no consideration ........................................................ 107 6.1.3.15 Deregistration and reinstatement of a company ........................................ 107 6.2 Events treated as disposals and acquisitions ............................................ 108 6.2.1 Disposal and reacquisition [para 12(1)] ..................................................... 108 6.2.2 Events treated as disposals [para 12(2)] ................................................... 109 6.2.2A Change of residence, ceasing to be controlled foreign company or

becoming headquarter company ............................................................... 115 6.2.3 Trading stock ceasing to be trading stock [para 12(3)] .............................. 120 6.2.4 Controlled foreign company becoming a resident [para 12(4)] ................... 123 6.2.5 Reduction or discharge of debt without full consideration [para 12(5)]

[repealed] .................................................................................................. 124 6.2.5.1 Introduction [para 12(5)(a)] [repealed] ....................................................... 124 6.2.5.2 Meaning of ‘debt owed’ and interest debts [repealed] ................................ 124 6.2.5.3 The creditor’s capital loss [repealed] ......................................................... 125 6.2.5.4 Treatment of the debtor when para 12(5) applies [repealed] ..................... 126 6.2.5.5 Debtor not permitted to use time apportionment [repealed] ....................... 126 6.2.5.6 Discharge for more than consideration received [repealed] ....................... 126 6.2.5.7 Debts denominated in foreign currency [repealed] .................................... 128 6.2.5.8 Debts not discharged by the creditor [repealed] ........................................ 128 6.2.5.9 Debts discharged through prescription [repealed] ..................................... 128 6.2.5.10 Gains otherwise accounted for [para 12(5)(a)] [repealed] .......................... 129 6.2.5.11 Disposal of assets between spouses [repealed] ........................................ 130 6.2.5.12 Loans to trusts discharged by donation [repealed]..................................... 131 6.2.5.13 Loan bequests [repealed] .......................................................................... 133 6.2.5.14 Amounts owing between group companies [para 12(5)(a)(bb)] [repealed] . 134 6.2.5.15 Waiver of debt upon winding-up, liquidation, deregistration or termination

of company [para 12(5)(a)(cc)] [repealed] ................................................. 138 6.2.6 Concession or compromise in respect of a debt ........................................ 142 6.2.6.1. Background ............................................................................................... 142 6.2.6.2 Definitions ................................................................................................. 144 6.2.6.3 Application [para 12A(2)] ........................................................................... 153 6.2.6.4 Time when a debt benefit arises under some specific circumstances ........ 154 6.2.6.5 Assets held at the time of the debt benefit [para 12A(3)] ........................... 155


6.2.6.6 Reduction of assessed capital loss [para 12A(4)] ...................................... 156 6.2.6.7 Pre-valuation date assets [para 12A(5)] .................................................... 157 6.2.6.8 Exclusions [para 12A(6)] ........................................................................... 158 6.3 Time of disposal and acquisition ................................................................ 168 6.3.1 Introduction ............................................................................................... 168 6.3.2 Dates of disposal not covered by para 13 .................................................. 173 6.3.3 Suspensive v resolutive conditions ............................................................ 174 6.3.4 Time of conclusion of contract ................................................................... 175 6.3.5 Impact of time of disposal on time of accrual or incurral ............................ 175 6.3.6 Cancellation of contracts ........................................................................... 178 6.3.7 Donations .................................................................................................. 183 6.3.8 Time of disposal = day before the specified event ..................................... 185 6.3.9 When does a person become a resident? ................................................. 185 6.3.10 Time of disposal = time of acquisition [para 13(2)] ..................................... 186 6.4 Disposal by spouses married in community of property ............................. 186 6.5 The accrual system and marriage out of community of property ................ 187

Chapter 7 – Limitation of losses ..................................................... 188 7.1 Personal-use aircraft, boats and certain rights and interests ..................... 188 7.2 Intangible assets acquired before valuation date ....................................... 190 7.3 Forfeited deposits ...................................................................................... 190 7.4 Disposal of options .................................................................................... 191 7.5 Losses on the disposal of certain shares ................................................... 191

Chapter 8 – Base cost ..................................................................... 192 8.1 Base cost – allowable expenditure ............................................................ 192 8.2 Base cost – domestic and unproductive expenditure ................................. 192 8.3 Base cost – direct costs of acquisition and disposal [para 20(1)(a) to (c)] .. 192 8.4 Base cost – composite acquisitions ........................................................... 194 8.5 Base cost – assets acquired by barter or exchange .................................. 195 8.5A Assets acquired before valuation date by donation, inheritance or by

distribution in specie .................................................................................. 196 8.5B Base cost of debt assets acquired through services rendered or as a

result of interest or dividends received or accrued ..................................... 198 8.5C Assets acquired by acquisitive prescription ............................................... 199 8.5D Acquisition of mining assets ...................................................................... 200 8.6 Base cost – assets acquired through deferred delivery ............................. 200 8.7 Base cost – donations tax paid by donor [para 20(1)(c)(vii)] ...................... 201 8.8 Base cost – donations tax paid by donee [para 20(1)(c)(viii)] .................... 203 8.9 Base cost – costs of establishing, maintaining or defending a legal title or

right in an asset [para 20(1)(d)] ................................................................. 204 8.10 Cost of improvements or enhancements to the value of an asset

[para 20(1)(e)] ........................................................................................... 205 8.11 Base cost – option acquired before, asset acquired or disposed of after

valuation date [para 20(1)(f)] ..................................................................... 206 8.12 Interest incurred to finance the cost of listed shares and participatory

interests in collective investment schemes [para 20(1)(g)] ......................... 208 8.13 Base cost – asset resulting in an inclusion in gross income upon

acquisition [para 20(1)(h)(i) to (iii)] ............................................................. 209 8.14 Base cost – asset acquired as a result of a ‘value shifting arrangement’

[para 20(1)(h)(iv)] ...................................................................................... 216 8.15 Base cost – asset acquired by heirs or legatees from non-resident estate

[para 20(1)(h)(v)] ....................................................................................... 216 8.15.1 Paragraph 2(1)(b) assets [proviso to para 20(1)(h)(v)] ............................... 216 8.15.2 All other assets [para 20(1)(h)(v)] .............................................................. 216


8.15A Base cost – asset acquired from a non-resident by way of donation, consideration not measurable in money or connected person transaction at a non-arm’s length price [para 20(1)(h)(vi)] ............................................ 216

8.16 Exclusions – specified current costs [para 20(2)] ....................................... 217 8.17 Reduction – expenditure already allowed [para 20(3)(a)] .......................... 218 8.18 Reduction – expenditure recovered or recouped [para 20(3)(b)] ................ 220 8.18A Reduction of base cost of assets of small, medium or micro-sized

enterprises ................................................................................................ 225 8.19 Reduction – para 20(3)(c).......................................................................... 230 8.19.1 Reduction – expenditure unpaid and not due and payable [old

para 20(3)(c)] ............................................................................................ 231 8.19.2 Reduction – Government grants, scrapping payments and ODA

assistance amounts [current para 20(3)(c)] ............................................... 233 8.20 Re-establishment of base cost after cancellation or termination of

agreement in a subsequent year [para 20(4)] ............................................ 233 8.20 Base cost – adjustment for currency gain or loss exclusion under

s 24I(11A) [para 20(4)] .............................................................................. 235 8.21 Base cost – exclusion of value-added tax allowed as input tax deduction

(s 23C) ...................................................................................................... 236 8.22 Base cost – farming development expenditure (para 20A) ........................ 237 8.22.1 The position before 22 December 2003 ..................................................... 237 8.22.2 The CGT implications ................................................................................ 237 8.22.3 The position on or after 22 December 2003 .............................................. 239 8.22.3.1 To whom does para 20A apply? ................................................................ 239 8.22.3.2 What is CDE? ............................................................................................ 239 8.22.3.3 Purpose ..................................................................................................... 240 8.22.3.4 The problem created by the wording of the First Schedule ........................ 240 8.22.3.5 Why is CDE forfeited on cessation of farming operations? ........................ 241 8.22.3.6 Key requirements for CDE to be added to base cost ................................. 241 8.22.3.7 The election............................................................................................... 241 8.22.3.8 The selection of a cost-identification method ............................................. 242 8.22.3.9 The loss-limitation rule [para 20A(2)] ......................................................... 242 8.22.3.10 Restriction when market value adopted as valuation date value

[para 20A(3)] ............................................................................................. 245 8.23 Base cost – prevention of double deductions (para 21) ............................. 245 8.24 Base cost – amount of donations tax to be included (para 22) .................. 246 8.25 Base cost – ‘value shifting arrangement’ (para 23) .................................... 246 8.26 Base cost – asset of a person who becomes a resident (para 24) ............. 246 8.27 Base cost – pre-valuation date assets (para 25) ........................................ 251 8.27.1 The general formula [para 25(1)] ............................................................... 251 8.27.2 Redetermination of capital gains and losses on disposal of pre-valuation

date assets [para 25(2) and (3)] ................................................................ 251 8.28 Valuation date value – when proceeds exceed expenditure or expenditure

in respect of an asset cannot be determined (para 26) .............................. 256 8.28.1 Introduction ............................................................................................... 256 8.28.2 Valuation date value methods when proceeds exceed allowable para 20

expenditure [para 26(1)] ............................................................................ 256 8.28.3 Limitation on ‘phantom’ losses [para 26(3)] ............................................... 257 8.28.4 Expenditure unknown [para 26(2)] ............................................................. 260 8.29 ‘20% of proceeds’ method ......................................................................... 261 8.30 Valuation date value – when proceeds do not exceed expenditure

(para 27) ................................................................................................... 262 8.30.1 Application [para 27(1) and (2)] ................................................................. 262 8.30.2 Assets whose market value has been determined or published

[para 27(3)] ............................................................................................... 263


8.30.2.1 Assets in respect of which a market value has been determined ............... 263 8.30.2.2 Assets with published values ..................................................................... 264 8.30.2.3 The first scenario [para 27(3)(a)] ............................................................... 264 8.30.2.4 The second scenario [para 27(3)(b)] ......................................................... 266 8.30.3 The third scenario [para 27(4)] .................................................................. 268 8.31 Valuation date value – instrument [para 28)] ............................................. 270 8.31.1 Some common bond terms ....................................................................... 270 8.31.2 The purpose of para 28 ............................................................................. 270 8.31.3 What is an ‘instrument’? ............................................................................ 270 8.31.4 Methods for determining the valuation date value of an instrument ........... 271 8.31.5 Identification methods ............................................................................... 274 8.31.6 The unlisted instrument kink test [para 28(2)] ............................................ 274 8.32 Base cost – instruments acquired on or after valuation date ...................... 275 8.32.1 Base cost .................................................................................................. 275 8.32.2 Proceeds ................................................................................................... 275 8.32.3 Determination of accrued interest .............................................................. 275 8.32.4 Accrued interest included in acquisition price ............................................ 275 8.33 Market value on valuation date .................................................................. 278 8.33.1 Introduction ............................................................................................... 278 8.33.2 Market value of financial instruments listed in South Africa

[para 29(1)(a)(i)] ........................................................................................ 278 8.33.3 Financial instruments listed outside South Africa [para 29(1)(a)(ii)] ........... 280 8.33.4 South African collective investment schemes in securities and property

shares [para 29(1)(b)(i)] ............................................................................ 280 8.33.5 Foreign collective investment schemes [para 29(1)(b)(ii)] .......................... 280 8.33.6 Other assets [para 29(1)(c)] ...................................................................... 281 8.33.7 Valuation of controlling interest in listed shares [para 29(2)] ...................... 281 8.33.8 Time limit on obtaining valuations [para 29(4)] .......................................... 282 8.33.8.1 Valuation date – 1 October 2001 ............................................................... 283 8.33.8.2 Valuation date after 1 October 2001 .......................................................... 284 8.33.9 Early submission of valuation forms [para 29(5)] ....................................... 285 8.33.10 Submission of proof of valuation upon disposal [para 29(6)] ...................... 288 8.33.10.1 The general rule ........................................................................................ 288 8.33.10.2 Valuer’s signature ..................................................................................... 289 8.33.10.3 Self-generated forms ................................................................................. 289 8.33.10.4 Assets denominated in foreign currency .................................................... 289 8.33.10.5 Identical assets ......................................................................................... 289 8.33.10.6 CFCs and valuations ................................................................................. 290 8.33.11 The impact of para 29 on the determination of STC on liquidation or

deregistration of a company ...................................................................... 290 8.33.12 Right of Commissioner to amend valuation or call for further particulars

[para 29(7)] ............................................................................................... 291 8.33.13 Period for performing valuations may be extended by Minister [old

para 29(8)] ................................................................................................ 294 8.33.14 Non-applicability of certain provisions to persons with a valuation date

after 1 October 2001 [para 29(8)] .............................................................. 294 8.33.15 Pre-valuation date depreciable assets and the market-value method ........ 294 8.34 Time-apportionment base cost .................................................................. 295 8.34.1 Introduction ............................................................................................... 295 8.34.2 Theoretical correctness v simplicity ........................................................... 297 8.34.3 The formulae ............................................................................................. 298 8.34.4 The standard time-apportionment formula [para 30(1)] .............................. 299 8.34.4.1 Determining ‘B’ for depreciable assets not falling into para 30(3) and (4) .. 299 8.34.4.2 The twenty-year limit ................................................................................. 300 8.34.4.3 Parts of a year ........................................................................................... 301


8.34.5 The standard proceeds formula [para 30(2)] ............................................. 301 8.34.5.1 No right of election to omit post-valuation date expenditure ....................... 302 8.34.5.2 Payment of commission by buyer .............................................................. 303 8.34.6 When to apply the standard formulae ........................................................ 303 8.34.7 Calculations must be made for each asset ................................................ 303 8.34.8 Time-apportionment base cost calculator .................................................. 305 8.34.9 The depreciable assets time-apportionment and proceeds formulae

[para 30(3) and (4)] ................................................................................... 308 8.34.9.1 Conditions under which the depreciable assets time-apportionment and

proceeds formulae apply [para 30(3)] ........................................................ 308 8.34.9.2 The formulae ............................................................................................. 309 8.34.10 Time-apportionment and selling expenses [para 30(5)] ............................. 311 8.34.10.1 Rationale ................................................................................................... 311 8.34.10.2 Exclusion of selling expenses from proceeds [para 30(5)(a)] ..................... 311 8.34.10.3 Exclusion of selling expenses from allowable para 20 expenditure

[para 30(5)(b)] ........................................................................................... 312 8.34.10.4 Definition – ‘selling expenses’ [para 30(5)(c)] ............................................ 312 8.34.11 Proof of expenditure .................................................................................. 312 8.34.12 Asset acquired for no consideration before valuation date......................... 313 8.34.13 Self-generated goodwill and time-apportionment ....................................... 313 8.34.14 Pre-CGT rationalisation schemes and time-apportionment ........................ 314 8.35 Market value.............................................................................................. 314 8.35.1 Introduction ............................................................................................... 314 8.35.2 Prescribed valuation methods ................................................................... 315 8.35.3 What is ‘market value’? ............................................................................. 317 8.35.4 Valuation of foreign insurance policies ...................................................... 317 8.35.5 ‘Market value less 30%’ and farming properties ........................................ 317 8.35.6 Market value – valuation of shares held in co-operatives........................... 322 8.35.7 Life expectancy tables ............................................................................... 322 8.36 Base cost – identical assets (para 32) ....................................................... 326 8.36.1 What are identical assets? ........................................................................ 326 8.36.2 Permissible methods for determining base cost of identical assets ........... 327 8.36.2.1 Specific identification ................................................................................. 327 8.36.2.2 First-in-first-out (FIFO) ............................................................................... 327 8.36.2.3 Weighted-average method ........................................................................ 327 8.36.3 Consistency............................................................................................... 330 8.36.3.1 The weighted average consistency rule [para 32(3A)] ............................... 331 8.36.3.2 The general consistency rule [para 32(6)] ................................................. 331 8.36.4 Time-apportionment and the kink tests ...................................................... 332 8.36.5 Third party reporting requirements ............................................................ 332 8.36.6 Relationship between the identification methods and valuation date value

methods .................................................................................................... 332 8.37 Part-disposals ........................................................................................... 333 8.37.1 Purpose and application ............................................................................ 333 8.37.2 The standard part-disposal formula [para 33(1)] ........................................ 335 8.37.3 Identifiable fraction method [para 33(2)] .................................................... 336 8.37.4 Record-keeping ......................................................................................... 337 8.37.5 Disposal of usufructs and similar interests and subsequent enhancements337 8.37.6 Events not treated as part-disposals [para 33(3)] ...................................... 337 8.37.6.1 Granting of an option [para 33(3)(a)] ......................................................... 337 8.37.6.2 Granting, variation or cession of a right of use or occupation without

proceeds [para 33(3)(b)] ............................................................................ 338 8.37.6.3 Improvement or enhancement of immovable property by lessee

[para 33(3)(c)] ........................................................................................... 339 8.37.6.4 Replacement of part of an asset comprising a repair [para 33(3)(d)] ......... 340


8.37.6.5 Acquisition of shares cum div .................................................................... 341 8.37.7 Granting, variation or cession of a right of use or occupation when

proceeds received or accrued [para 33(4)] ................................................ 341 8.37.8 Consistent adoption of the ‘20% of proceeds’ method [para 33(5)] ............ 344 8.37.9 Part-disposal of goodwill ........................................................................... 345 8.38 Debt substitution ....................................................................................... 346 8.39 Exchange control and related tax amnesty assets ..................................... 347 8.39.1 Introduction ............................................................................................... 347 8.39.2 Election in respect of assets held by foreign discretionary trust under

amnesty provisions.................................................................................... 349 8.39.3 Limitation of base cost of amnesty assets ................................................. 351 8.39.4 Disposal of shares at cost by trust to resident under Circular D 405 .......... 353 8.39A Additional voluntary disclosure relief ......................................................... 355 8.40 Base cost of assets acquired through the issue of shares or debt ............. 357 8.41 Value mismatches arising when assets are acquired through the issue of

shares ....................................................................................................... 359 8.41.1 Application ................................................................................................ 359 8.41.2 Value of asset exceeds value of shares .................................................... 360 8.41.3 Value of shares exceeds value of asset .................................................... 360 8.41.4 Exclusions ................................................................................................. 361 8.42 Cross issues of shares .............................................................................. 363 8.42.1 Application ................................................................................................ 363 8.42.2 Shares issued in exchange for issue of shares [s 24B(2)] ......................... 363 8.42.3 Issue of preference shares in exchange for an issue of ordinary shares or

convertible preference shares [s 24B(2A)] ................................................. 363 8.42.4 Disposal of preference share under intra-group transaction [s 24B(2B)] .... 365 8.42.5 Asset moving down a chain of controlled companies by consecutive share

issues [s 24B(2C)] ..................................................................................... 366 Chapter 9 – Proceeds ...................................................................... 367

9.1 Proceeds from disposal ............................................................................. 367 9.1.1 Inclusions in proceeds [para 35(1)] ............................................................ 367 9.1.1.1 ‘Amount’ .................................................................................................... 367 9.1.1.2 ‘Received by or accrued to’ ....................................................................... 368 9.1.1.3 ‘In respect of’ ............................................................................................. 368 9.1.1.4 Specific inclusion – Reduction or discharge of debt [para 35(1)(a)] ........... 368 9.1.1.5 Specific inclusion – Compensation to lessee from lessor for improvements

to property [para 35(1)(b)] ......................................................................... 369 9.1.1A Proceeds from the issue of shares in exchange for shares in a foreign

company [para 35(1A)] .............................................................................. 369 9.1.2 Proceeds from ‘value shifting arrangement’ [para 35(2)] ........................... 369 9.1.3 Reduction in proceeds [para 35(3)] ........................................................... 369 9.1.3.1 Amounts included in gross income / taxable income [para 35(3)(a)] .......... 370 9.1.3.2 Proceeds repaid or repayable [para 35(3)(b)] ............................................ 371 9.1.3.3 Amounts reduced as a result of cancellation, termination, variation,

prescription, waiver or release from obligation [para 35(3)(c)] ................... 371 9.1.4 Disregarding of present value [para 35(4)] ................................................ 375 9.1.5 Proceeds – composite disposals ............................................................... 375 9.1.6 CGT of seller payable by purchaser .......................................................... 376 9.2 Disposal of partnership asset .................................................................... 377 9.2.1 Date of accrual of proceeds ....................................................................... 377 9.2.2 Guidelines for the treatment of partnerships .............................................. 378 9.2.2.1 Introduction of new partner ........................................................................ 378 9.2.2.2 Assets contributed to the partnership ........................................................ 378 9.2.2.3 Withdrawal of partner ................................................................................ 379


9.2.2.4 Assets disposed of by the partnership ....................................................... 379 9.2.2.5 Partners as connected persons and goodwill ............................................ 390 9.2.2.6 Dissolution of partnership .......................................................................... 390 9.2.2.7 Foreign partnerships ................................................................................. 391 9.3 Assets of trust and company ..................................................................... 391 9.4 Disposal by donation, consideration not measurable in money and

transactions between connected persons not at an arm’s length price ...... 392 9.4.1 Application ................................................................................................ 392 9.4.2 ‘Not measurable in money’ ........................................................................ 392 9.4.3 ‘Acting at arm’s length’ .............................................................................. 393 9.4.4 Substitution of market value for non-arm’s length consideration ................ 393 9.4.5 Acquisition of asset by resident from non-resident .................................... 393 9.4.6 Asset acquired or disposed of between connected persons under option

contract ..................................................................................................... 394 9.4.7 Disposals to which para 38 does not apply ................................................ 395 9.4.8 Pre-valuation date disposals ..................................................................... 396 9.4.9 The receipt of a donation ........................................................................... 397 9.5 Capital losses determined in respect of disposals to certain connected

persons ..................................................................................................... 399 9.5.1 The clogged loss rule ................................................................................ 399 9.5.2 Persons subject to ring-fencing of capital losses and timing of

determination of relationship between parties [para 39(1)] ........................ 399 9.5.3 Ring-fencing of capital losses [para 39(2)] ................................................. 402 9.5.4 Restricted meaning of ‘connected person’ [para 39(3)] .............................. 403 9.5.5 Disposals to beneficiaries of share incentive trusts [para 39(4)] ................ 404 9.5.6 Losses on disposal of certain debts not clogged [para 56(2)] .................... 404 9.6 Short-term disposals and acquisitions of identical financial instruments .... 405 9.7 Hold-over of capital gain on forced sale of listed shares ............................ 409 9.8 Dividends treated as proceeds on disposal of certain shares .................... 411 9.8.1 Background ............................................................................................... 412 9.8.2 Definitions [para 43A(1)] ............................................................................ 412 9.8.3 Application of para 43A(2) ......................................................................... 414 9.9 Base cost of asset of controlled foreign company operating in a country

which has abandoned a hyperinflationary currency ................................... 416 Chapter 10 – Unquantified and unaccrued amounts ..................... 418

10.1 Overview ................................................................................................... 418 10.2 Incurral and accrual of amounts in respect of assets acquired or disposed

of for unquantified amount ......................................................................... 418 10.2.1 Introduction ............................................................................................... 419 10.2.2 Disposal of asset for unquantifiable consideration [s 24M(1)] .................... 420 10.2.3 Acquisition of asset for unquantifiable consideration [s 24M(2)] ................ 420 10.2.4 Recovery or recoupment of amounts allowed as deductions [s 24M(3)] .... 421 10.2.5 Determination of deductions in respect of depreciable assets [s 24M(4)] .. 421 10.3 Incurral and accrual of amounts in respect of disposal or acquisition of

equity shares (s 24N) ................................................................................ 422 10.3.1 Application ................................................................................................ 422 10.3.2 Conditions ................................................................................................. 423 10.3.3 Consequences for seller ............................................................................ 423 10.3.4 Consequences for purchaser .................................................................... 423 10.4 Disposal of asset for unaccrued amounts of proceeds .............................. 424 10.4.1 Introduction ............................................................................................... 424 10.4.2 Disregarding of capital loss [para 39A(1)] .................................................. 424 10.4.3 Set-off of ring-fenced capital loss against subsequent capital gains

[para 39A(2)] ............................................................................................. 424


10.4.4 Lifting of ring-fencing of capital loss [para 39A(3)] ..................................... 427 10.5 Disposal of certain debt claims .................................................................. 427 10.5.1 Application [para 35A(1)] ........................................................................... 427 10.5.2 Deemed allocation of consideration from disposal of claim to disposal of

asset [para 35A(2)] .................................................................................... 428 10.5.3 Disregarding of portion of capital gain or loss on disposal of right to claim

payment [para 35A(3)] ............................................................................... 428 10.6 Limitation of allowance under s 11(o) [s 20B)] ........................................... 429 10.7 Incurral and accrual of amounts in respect of option contracts .................. 430

Chapter 11 – Primary residence exclusion .................................... 432 11.1 Definitions ................................................................................................. 432 11.1.1 Definition – ‘an interest’ ............................................................................. 432 11.1.2 Definition – ‘primary residence’.................................................................. 433 11.1.2.1 General ..................................................................................................... 433 11.1.2.2 Polygamous marriages .............................................................................. 434 11.1.2.3 Mainly for domestic purposes .................................................................... 434 11.1.2.4 Non-residents ............................................................................................ 435 11.1.2.4.1 The meaning of ‘ordinarily resides’ ............................................................ 435 11.1.2.4.2 No primary residence offshore .................................................................. 435 11.1.2.4.3 More than one primary residence .............................................................. 435 11.1.3 Definition – ‘residence’ .............................................................................. 436 11.2 General principle ....................................................................................... 437 11.2.1 The primary residence exclusion [para 45(1)] ............................................ 437 11.2.2 Apportionment of the primary residence exclusion when more than one

person has an interest in a primary residence [para 45(2)] ........................ 438 11.2.3 Only one residence at a time may be a primary residence of a person

[para 45(3)] ............................................................................................... 440 11.2.4 Restriction on use of the R2 million proceeds threshold for exclusion

[para 45(4)] ............................................................................................... 441 11.3 Part-disposal of a primary residence ......................................................... 442 11.4 Awards of damages in respect of loss of a view ........................................ 444 11.5 Size of residential property qualifying for exclusion ................................... 445 11.5.1 The size limitation [para 46(a)] .................................................................. 445 11.5.2 The use with the residence requirement [para 46(b)] ................................. 445 11.5.3 The simultaneous disposal requirement [para 46(c)] ................................. 445 11.5.4 Adjacent land ............................................................................................ 446 11.6 Apportionment for periods when not ordinarily resident ............................. 448 11.7 Disposal and acquisition of primary residence ........................................... 450 11.7.1 Residence vacated and offered for sale [para 48(a)] ................................. 451 11.7.2 Erection of new primary residence [para 48(b)] ......................................... 451 11.7.3 Primary residence rendered accidentally uninhabitable [para 48(c)] .......... 451 11.7.4 Death of person with an interest in a primary residence [para 48(d)] ......... 452 11.8 Non-residential use ................................................................................... 453 11.9 Rental periods ........................................................................................... 456 11.10 Valuation of primary residences on farms .................................................. 457 11.10.1 Introduction ............................................................................................... 457 11.10.2 Valuation date value of an asset acquired before 1 October 2001

(valuation date) ......................................................................................... 457 11.10.3 Methods of valuation ................................................................................. 458 11.10.4 Farms with a market value not exceeding R300 000 ................................. 458 11.10.5 Proceeds in excess of R300 000 ............................................................... 459 11.10.6 Comparable sales ..................................................................................... 459 11.10.7 Adjusted replacement cost ........................................................................ 459 11.10.8 Time-apportionment base cost .................................................................. 459


11.10.9 Conclusion ................................................................................................ 460 11.11 Transferring a residence out of a company ............................................... 460

Chapter 12 – Other exclusions ....................................................... 464 12.1 General principle ....................................................................................... 464 12.2 Personal-use assets .................................................................................. 464 12.3 Retirement benefits ................................................................................... 465 12.4 Long-term assurance ................................................................................ 465 12.4.1 What is a ‘policy’? [para 55(2)] .................................................................. 465 12.4.2 Disregarding of capital gains and losses by original beneficial owner

[para 55(1)(a)(i)] ........................................................................................ 466 12.4.3 Exclusion of certain second-hand policy proceeds .................................... 467 12.4.3.1 The spouse, nominee, dependant or deceased estate exclusion

[para 55(1)(a)(ii)] ....................................................................................... 467 12.4.3.2 The former spouse exclusion [para 55(1)(a)(iii)] ........................................ 468 12.4.3.3 The employee / director exclusion [para 55(1)(b)] ..................................... 469 12.4.3.4 The partners and shareholders exclusion [para 55(1)(c)]........................... 470 12.4.3.5 The pension, provident or retirement annuity fund policy exclusion

[para 55(1)(d)] ........................................................................................... 470 12.4.3.6 Risk policy with no value [para 55(1)(e)] .................................................... 471 12.4.3.7 Policies in respect of which the premiums were taxed as a fringe benefit

or not deductible [para 55(1)(f)] ................................................................. 471 12.4.4 Second-hand policies subject to CGT ....................................................... 472 12.4.4.1 Non-qualifying second-hand policies ......................................................... 472 12.4.4.2 Why are second-hand policies subject to CGT? ........................................ 472 12.4.4.3 Determination of capital gains and losses on second-hand policies .......... 473 12.4.4.4 Part-withdrawals from second-hand policies.............................................. 473 12.4.4.5 Foreign policies subject to CGT................................................................. 474 12.5 Disposal by creditor of debt owed by connected person ............................ 475 12.6 Disposal of small business assets on retirement ....................................... 478 12.6.1 Definitions [para 57(1)] .............................................................................. 478 12.6.2 Requirements for exclusion [para 57(2)] .................................................... 479 12.6.3 Amount to be disregarded [para 57(3)] ...................................................... 481 12.6.4 Time limit for disposal of assets [para 57(4)] ............................................. 481 12.6.5 Multiple businesses [para 57(5) and (6)] .................................................... 482 12.6A Disposal of micro business assets ............................................................. 485 12.7 Exercise of options .................................................................................... 486 12.8 Compensation for personal injury, illness or defamation ............................ 488 12.9 Gambling, games and competitions (para 60) ........................................... 489 12.10 Portfolios of collective investment schemes other than portfolios of

collective investment schemes in property (para 61) ................................. 490 12.11 Donations and bequests to public benefit organisations and exempt

persons (para 62) ...................................................................................... 491 12.12 Exempt persons (para 63) ......................................................................... 493 12.13 Public benefit organisations ....................................................................... 495 12.13.1 The system of partial taxation .................................................................... 495 12.13.2 Valuation date of PBOs ............................................................................. 495 12.13.3 Disregarding of capital gains and losses (para 63A) .................................. 497 12.14 Assets used to produce exempt income (para 64) ..................................... 502 12.15 Awards under the Restitution of Land Rights Act [para 64A(a)] ................. 503 12.16 Government scrapping payments [para 64A(b)] ........................................ 503 12.16A Land donated under land reform measures ............................................... 504 12.16B Disposal by trust under share incentive scheme ........................................ 504 12.17 Recreational clubs (para 65B) ................................................................... 505 12.17.1 Background ............................................................................................... 505


12.17.2 Application of para 65B ............................................................................. 509 12.17.3 Disregarding of capital gain [para 65B(2)] ................................................. 510 12.17.4 Apportionment of capital gain across multiple replacement assets

[para 65B(3)] ............................................................................................. 510 12.17.5 Recognition of capital gain [para 65B(4)] ................................................... 510 12.17.6 Failure to conclude contract or bring assets into use [para 65B(5)] ........... 510 12.18 Small business funding entities (para 63B) ................................................ 513 12.19 Disposal of equity shares in foreign companies (para 64B) ....................... 515 12.19.1 Effective date ............................................................................................ 515 12.19.2 Background ............................................................................................... 515 12.19.3 Exclusion of capital gains and losses on disposal of foreign company

shares [para 64B(1)] .................................................................................. 515 12.19.4 Disposal of equity shares by headquarter company [para 64B(2)] ............. 521 12.19.5 Capital gain on disposal of CFC to connected person [para 64B(3)] .......... 521 12.19.6 Disregarding of capital gain arising from foreign return of capital

[para 64B(4)] ............................................................................................. 524 12.19.7 Exclusion of equity shares in a portfolio of a collective investment scheme

[para 64B(5)] ............................................................................................. 524 12.20 Disposal of restricted equity instruments ................................................... 524 12.21 International shipping companies .............................................................. 526

Chapter 13 – Roll-overs ................................................................... 527 13.1 Involuntary disposal (para 65) ................................................................... 527 13.1.1 Summary of provisions .............................................................................. 527 13.1.2 Introduction ............................................................................................... 527 13.1.3 Conditions under which an election to defer a capital gain may be made

[para 65(1)] ............................................................................................... 528 13.1.4 Disregarding of capital gain [para 65(2)] .................................................... 530 13.1.5 Allocation of capital gain over multiple replacement assets (para 65[3)] .... 531 13.1.6 Depreciable assets – spreading of capital gain in proportion to capital

allowances on replacement asset [para 65(4)] .......................................... 531 13.1.7 Recognition of any remaining untaxed portion of a capital gain in year of

disposal of replacement asset [para 65(5)] ................................................ 532 13.1.8 Failure to conclude contract or bring replacement asset into use

[para 65(6)] ............................................................................................... 533 13.1.9 Replacement assets comprising personal-use assets [para 65(7)] ............ 534 13.2 Reinvestment in replacement assets (para 66) .......................................... 535 13.3 Transfer of asset between spouses (para 67) ............................................ 538 13.3.1 Scope and application ............................................................................... 539 13.3.2 The transferor (disposing) spouse ............................................................. 541 13.3.3 The transferee (acquiring) spouse ............................................................. 541 13.3.4 Deleted ...................................................................................................... 542 13.3.5 Deleted ...................................................................................................... 542 13.3.6 Non-resident spouses and anti-avoidance ................................................. 542 13.4 Interests in collective investment schemes in property .............................. 543 13.5 REITs ........................................................................................................ 544 13.6 Disposal of immovable property by share block company (para 67B) ........ 547 13.7 Mineral rights conversions and renewals (para 67C) ................................. 550 13.8 Communications licence conversions ........................................................ 551 13.9 Tax-free investments ................................................................................. 553

Chapter 14 – Trusts and trust beneficiaries ................................... 555 14.1 Summary ................................................................................................... 555 14.2 Historical background ................................................................................ 559 14.3 Trusts under the Income Tax Act ............................................................... 560 14.4 Trusts under South African common law ................................................... 560


14.5 Types of trusts ........................................................................................... 560 14.5.1 The bewind trust ........................................................................................ 560 14.5.2 Inter vivos and testamentary trusts ............................................................ 561 14.5.3 Vesting and discretionary trusts................................................................. 561 14.5.4 Special trusts ............................................................................................. 561 14.5.5 Charitable trusts ........................................................................................ 561 14.5.6 Offshore trusts ........................................................................................... 562 14.5.7 Invalid trusts .............................................................................................. 562 14.6 The trustee ................................................................................................ 564 14.7 Rights of beneficiaries ............................................................................... 564 14.7.1 Vested rights ............................................................................................. 565 14.7.2 Contingent rights ....................................................................................... 567 14.7.3 Personal rights .......................................................................................... 567 14.7.4 Real rights ................................................................................................. 567 14.7.5 Exchange of rights..................................................................................... 568 14.8 Impact of the core rules ............................................................................. 570 14.9 The CGT consequences of vesting trusts .................................................. 572 14.9.1 What is a vesting trust? ............................................................................. 572 14.9.2 The position upon vesting.......................................................................... 572 14.9.3 Capital losses ............................................................................................ 572 14.9.4 The position after vesting .......................................................................... 572 14.9.5 Transfer of vested asset to beneficiary ...................................................... 573 14.9.6 Admission of additional vested beneficiary ................................................ 573 14.10 The CGT consequences of discretionary trusts ......................................... 574 14.11 Attribution of capital gain to resident beneficiary (para 80) ........................ 574 14.11.1 Some general observations on para 80(1) and (2) .................................... 574 14.11.2 Application of para 80(1) and (2) to non-resident trusts ............................. 576 14.11.3 Types of disposal giving rise to attribution to a beneficiary ........................ 576 14.11.4 Events not subject to attribution under para 80(1) and (2) ......................... 576 14.11.5 Vesting of asset [para 80(1)] ..................................................................... 582 14.11.5.1 Vesting of an asset through multiple discretionary trusts ........................... 583 14.11.5.2 Vesting of asset in vesting trust ................................................................. 583 14.11.5.3 Vesting of capital v vesting of an asset ...................................................... 584 14.11.6 Vesting of capital gain in same year of assessment [para 80(2)] ............... 586 14.11.6.1 Application ................................................................................................ 586 14.11.6.2 Vesting of capital gain in multiple beneficiaries .......................................... 588 14.11.6.3 Capital gain flowing through multiple discretionary trusts........................... 589 14.11.6.3A Multiple vesting trusts and the flow-through principle ................................. 589 14.11.6.4 Vesting of capital profits v capital gains ..................................................... 591 14.11.7 Tax-saving effect of attributing capital gains to beneficiaries ..................... 593 14.11.8 Capital gain attributed to resident beneficiary of non-resident trust

[para 80(3)] ............................................................................................... 593 14.12 Base cost of interest in a discretionary trust (para 81) ............................... 600 14.13 Special trusts ............................................................................................. 601 14.13.1 Trusts for beneficiaries with a disability [para (a)] ...................................... 601 14.13.2 Testamentary trusts for relatives who include minors [para (b)] ................. 603 14.13.3 Death of beneficiary of special trust (para 82) ........................................... 603

Chapter 15 – Attribution of capital gains ....................................... 604 15.1 Summary ................................................................................................... 604 15.2 The meaning of donation, settlement or other disposition .......................... 605 15.3 Attribution of capital gain to spouse (para 68) ............................................ 606 15.4 Attribution of capital gain to parent of minor child (para 69) ....................... 608 15.5 Attribution of capital gain subject to conditional vesting (para 70) .............. 609 15.6 Attribution of capital gain subject to revocable vesting (para 71) ............... 610


15.7 Attribution of capital gain vesting in a person who is not a resident (para 72) ................................................................................................... 611

15.8 Attribution of income and capital gain (para 73) ......................................... 613 15.9 Amnesty – attribution after deemed disposal by electing party .................. 615 15.9.1 Background ............................................................................................... 615 15.9.2 Suspension of attribution rules .................................................................. 616 15.9.3 Attribution during the period of deemed ownership .................................... 616 15.9.4 Attribution before the period of deemed ownership.................................... 616 15.9.5 Resumption of attribution upon cessation of deemed ownership ............... 617 15.10 Right of recovery ....................................................................................... 618

Chapter 16 – Deceased estates ...................................................... 619 16.1 Introduction ............................................................................................... 619 16.2 The deceased person ................................................................................ 621 16.2.1 Deemed disposal by deceased person [s 9HA(1)] ..................................... 621 16.2.2 Bequests to specified exempt or partially exempt bodies. ......................... 622 16.2.3 Record-keeping and valuation issues ........................................................ 623 16.2.4 Trading stock, livestock and produce and allowance assets ...................... 623 16.2.5 Pre-valuation date livestock ....................................................................... 626 16.2.6 Plantations and growing crops .................................................................. 627 16.2.7 Usufructs created on death ....................................................................... 628 16.2.8 Annual exclusion in year of death .............................................................. 629 16.2.9 Small business asset relief ........................................................................ 629 16.2.10 Assets transferred to a surviving spouse [s 9HA(2)] .................................. 629 16.3 The deceased estate ................................................................................. 633 16.3.1 Acquisition of assets by deceased estate from deceased person [s 25(2)] 633 16.3.2 Assets disposed of to third parties during the winding-up period ............... 633 16.3.3 Assets disposed of to heirs or legatees [s 25(3)(a)] ................................... 635 16.3.4 Deceased estate treated as natural person [s 25(5) and para 40(3)] ......... 635 16.3.4 Pre-valuation date estates ......................................................................... 636 16.3.5 Deceased estate of a non-resident ............................................................ 636 16.4 Heirs or legatees ....................................................................................... 637 16.4.1 Meaning of heir or legatee ......................................................................... 637 16.4.2 Acquisition of assets by heirs or legatees [s 25(3)(b)] ................................ 638 16.4.3 Asset transferred directly to heir or legatee [s 9HA(3)] .............................. 641 16.4.4 Assets acquired by surviving spouse [s 25(4)] ........................................... 642 16.4.5 Pre-valuation date inheritances ................................................................. 643 16.4.6 Assets acquired by inheritance from non-resident estates ......................... 643 16.4.7 Massed estates ......................................................................................... 644 16.4.8 Redistribution agreements ......................................................................... 646 16.4.9 Tax payable by heir of a deceased estate [s 25(6)] ................................... 654

Chapter 17 – Insolvent estates and companies in liquidation ...... 657 17.1 Application of the sections of the Act ......................................................... 657 17.1.1 The three entities ...................................................................................... 657 17.1.2 Date of sequestration ................................................................................ 657 17.1.3 Submission of returns [proviso to s 66(13)(a)] ........................................... 658 17.1.4 Person before sequestration and insolvent estate – the one and the same

person rule ................................................................................................ 658 17.1.5 Setting aside of sequestration order .......................................................... 659 17.1.6 Rehabilitation ............................................................................................ 659 17.2 Treatment of assets and assessed capital losses (para 83) ...................... 659 17.3 Companies in liquidation ........................................................................... 663

Chapter 18 – Company distributions .............................................. 665 18.1 Company distributions – definitions ........................................................... 665 18.1.1 Definition – ‘date of distribution’ ................................................................. 665


18.1.2 Definition – ‘dividend’ [s 1(1)] .................................................................... 665 18.1.2 Definition – ‘contributed tax capital’ [s 1(1)] ............................................... 668 18.1.3 Definition – ‘foreign return of capital’ ......................................................... 672 18.1.4 Definition – ‘return of capital’ ..................................................................... 672 18.2 Distributions in specie by a company ........................................................ 673 18.3 Returns of capital – Historical developments and international comparison676 18.4 Returns of capital – Summary and overview of paras 76, 76A and 76B..... 677 18.5 Returns of capital –transitional measures (para 76)................................... 678 18.5.1 Pre-valuation date return of capital or foreign return of capital

[para 76(1)(a)] ........................................................................................... 679 18.5.2 Pre-1 October 2007 return of capital or foreign return of capital when

shares disposed of on or before 31 March 2012 [para 76(1)(b)] ................ 680 18.5.3 Return of capital or foreign return of capital received or accrued between

1 October 2007 and 31 March 2012 [para 76(1)(c)] ................................... 680 18.5.4 Return of capital or foreign return of capital received or accrued before

1 October 2007 when the weighted-average method is used [para 76(2)] . 680 18.6 Reporting of a return of capital to shareholders [para 76(4)] ...................... 683 18.7 Return of capital triggering Part-disposal of shares (para 76A) .................. 683 18.8 Returns of capital – Reduction in base cost of shares (para 76B) .............. 688 18.8.1 Pre-valuation date shares [para 76B(1)] .................................................... 688 18.8.2 Pre-1 October 2007 return of capital [para 76A(1A)] .................................. 691 18.8.3 Base cost reduction [para 76B(2)] ............................................................. 691 18.8.4 Return of capital exceeding base cost [para 76B(3)] ................................. 692 18.9 Returns of capital included in income ........................................................ 693 18.9.1 Share-dealers ............................................................................................ 693 18.9.2 Returns of capital received on s 8C restricted equity instruments .............. 695 18.10 Distribution in liquidation or deregistration received by holders of shares

(para 77) ................................................................................................... 695 18.10.1 Purpose ..................................................................................................... 695 18.10.2 Returns of capital before disposal ............................................................. 695 18.10.3 Disposal and time of disposal [para 77(1)] ................................................. 696 18.10.3.1 Date of dissolution ..................................................................................... 696 18.10.3.2 Date of deregistration ................................................................................ 696 18.10.4 Distributions after date of disposal [para 77(2)] ......................................... 696 18.11 Share buy-backs ....................................................................................... 697 18.12 Issue of shares or options for no consideration (s 40C) ............................. 699 18.13 Substitutive share-for-share transactions (s 43) ........................................ 702 18.13.1 Definitions ................................................................................................. 703 18.13.2 Disposal of pre-valuation date equity shares [s 43(1A)] ............................. 704 18.13.3 Deemed proceeds equ

introduction of capital gains tax · 2019-11-06 · comprehensive guide to capital gains tax (issue...

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