CGT Slides 2018 - 4th Year

Taxation IV CGT
Capital Gains Tax (CGT)
References:
Eighth Schedule of the Income Tax Act, No.
58 of 1962
SILKE: South African Income Tax 2018:
Chapter 17
1
Structure of the Eighth Schedule

Definitions 1
When is CGT applicable 2
Determination of CGT amount 3 – 10
Disposal 11,12,14
When does disposal occur - Time 13
Loss limitations 15 – 19
Base Cost 20 – 34
Proceeds 35 – 43
Primary residence 44 – 51A
Other exclusions 52 – 64B
Roll overs 65 – 67
Attribution rules 68 – 73
Company distributions 74 – 77
Trusts 80 – 82
Insolvent estates 83 2
In this module:
 General
 Assets
 Disposals
 Proceeds
 Base Cost
 Special provisions
 Exclusions, roll-overs, attributions
 Specific Persons and Entities
1
Taxation IV CGT
Capital Gains Tax
General
Introduction
 Not a separate tax

 ‘Taxable capital gain’ included in taxable
income (s 26A) and subject to normal tax
 ‘Taxable capital gain’ - determined per
Eighth Schedule
 Section 26A thus links principal Act and
Eighth Schedule (but principles of the Act
takes precedence)
5
Taxable income
2
Taxation IV CGT
Taxable capital gain
*Only applies for years of assessment beginning on or after 1 March 2016

7
Effective maximum CGT rates – 2018 Year

of Assessment
Taxpayer Inclusion Statutory Rate on Effective
rate* Income Tax Rate
Natural Person 40% Maximum – 45% 18.0%
Trusts
> Special Trust 40% Maximum – 45% 18.0%
> Not a Special Trust 80% 45% flat rate 36.0%
(“Ordinary Trust”)
Companies 80% 28% flat rate 22.4%
*Only applies for years of assessment beginning on or after 1 March 2016
Four Pillars
Asset Proceeds
CGT
Base
Disposal
cost
3
Taxation IV CGT
Capital Gains Tax
Asset
10
Definition of asset (para 1)
 (a) Property of any nature whether:

 Movable or Immovable,
 Corporeal or Incorporeal,
 Excludes currency (cash) but includes any
coin made from gold or platinum
AND
 (b) Right or interest of any nature in such
property
 Includes a right that can be disposed of or
turned into money
11
Definition of asset (para 1)

 Definition of asset includes ALL assets
(i.e. capital & non-capital)
 Non-capital should be taxed under
principal Act hence no CGT (nil value
taxable under Eighth Schedule)
 Example: trading stock

 Sales = 100 - s1 gross income
 Purchases = 50 - s11(a) deduction
 CGT Proceeds = 100 less 100 GI
 CGT Base Cost = 50 less 50 s11(a) deduction

 Note: do not always need to show above for exam purposes
12
4
Taxation IV CGT
Who is liable? (para 2)
 Residents
 Any assets situated anywhere in the world
(worldwide disposals of assets)
 Non-residents
 SA source assets
 Immovable property in the Republic
 Note WHT applies (>R2million) (s35A ITA)
 Interest in immovable property in SA
 Assets attributable to a Permanent
Establishment in the Republic
13
Who is liable?
 Interest in immovable property in SA

 Interest = Equity shares / Ownership in
another entity / vested interest in assets of a
trust
 ≥ 80% of MV of interest attributable to
immovable property in SA (note: direct or
indirect) which is not held as trading stock
 Non-resident + connected persons hold
≥20% of interest (note: direct or indirect)
 Rule does not apply iro interest in vested trust
14
Example – non-resident
 A UK resident individual owns 100% of a UK
resident company. The UK resident company
owns the following:
 A UK situated property with a market value
of R1 mill. The total asset value of UK Co is
also R1mill.
 50% of the shares in a South African
company which owns property with a
market value of R15 million. The total asset
value of the SA co (based on market values)
is R16 million.
15
5
Taxation IV CGT
UK Resident
100%
UK Company
(Asset Value
=R1m)
50% 100%
SA Company
UK Property
(Asset value
(R1m)
= R16m)
50%
SA Property
(MV of
R15m)
16
Example – non-resident
 NB if UK resident disposes of shares in UK Co [1] OR
if UK Co disposes of shares in SA Co [2] – disposal
may be pulled into SA tax net
 Non-resident disposing of asset – YES but SA source?

 Interest held – YES (equity shares)
 Non-resident and connected person hold direct/indirect
interest of at least 20% - YES
 At time of disposal, 80% or more of the market value of
interest is ascribed to the immovable property – YES
[1] shares in UK Co have a MV of R1mill + R8mill (50% of
total value of SA Co) = R9mill, of which R7.5mill relates to
immovable property in SA (83.33% (7.5/9))
[2] shares in SA Co have a MV of R8mill of which R7.5mill
relates to immovable prop in SA (93.75% (7.5/8))
17
Capital Gains Tax
Disposal
18
6
Taxation IV CGT
Disposal events
 CGT trigger
 Refers to an event, act, forbearance or
operation of law which results in the
creation, variation, transfer or
extinction of an asset
 Includes specific occurrences - para 11(1)
 Note: spouses married in community of
property - disposal treated as if made by
both in equal shares (para 14) for assets
falling into joint estate
19
Disposal event (para 11(1))
 Disposals include:
 the sale, donation, expropriation, conversion, grant,
cession, exchange or any other alienation or transfer of
ownership of an asset;
 the forfeiture, termination, redemption, cancellation,
surrender, discharge, relinquishment, release, waiver,
renunciation, expiry or abandonment of an asset;
 the scrapping, loss, or destruction of an asset;
 the vesting of an interest in an asset of a trust in a
beneficiary (refer to Trusts Module);
 the distribution of an asset by a company to a
shareholder; or
 the granting, renewal, extension or exercise of an option.
20
Disposal event (para 11(2))
 Disposals exclude:
 Transfer of an asset as security for a debt
 Issue or cancellation of a share / member’s
interest / participatory interest
 Subdivision or consolidation of shares or
conversion from par value to no par value
 Paragraph 11(2)(n): No disposal of
asset where a share is transferred in terms
of a lending arrangement or collateral
arrangement
 …Refer to SILKE for further detail
21
7
Taxation IV CGT
Deemed disposals
(para 12, para 12A, s9H, para 40)
 Events treated as disposals

 Either used to trigger a capital gain/loss or
to establish base cost
 Deemed disposal at market value
 And deemed reacquisition at market value
22
What is market value? (para 31)
 General rule:
 Price paid by a willing buyer to a willing
seller dealing at arm’s length in an open
market
 Special rules (Market value will be given)
for:
 Financial instruments; unlisted shares; LT
insurance policies; unit trusts; usufructs;
fiduciary & similar assets
23
Deemed disposals
 Includes:
 Person commences to be a resident (p 12(2))
 Person ceases to be a resident (s 9H)
 When does this happen for natural person? Company?
 Company commences/ceases to be a CFC
(p12(2)/(4), s9H)
 Asset becomes/ceases to be asset of a SA PE
(p12(2))
 Capital asset becomes trading stock and vice versa
(p12(2)/(3))
 Personal use asset becomes non-personal use and
vice versa (p12(2))
 Reduction of debt (p12A)
24
8
Taxation IV CGT
Time of disposal (para 13)

 Specific event, act, forbearance or operation of law
– when it occurs
 Not necessarily same date as change of ownership
 Consider:
 Suspensive condition – (condition which suspends
rights and obligations until the uncertain future event occurs )
 Donation
 Scrapping, loss or destruction
 Extinction eg. waiver or abandonment
 Distribution to a shareholder
 Deemed disposal?
 Acquisition of asset by other person occurs at the
time of disposal (para 13(2)) 25
Capital Gains Tax
Proceeds
26
Calculation of capital gain / loss

(paras 3 & 4)
 Asset disposed of in current Year of Assessment:
 Proceeds
 less Base cost
 equals Capital gain or loss
 Asset disposed of in a previous Year of Assessment:

 Adjust for:
 Amounts received/accrued that were not taken into
account in proceeds
 Portion of proceeds no longer recoverable / no longer
entitled to / that were repaid or is repayable
 Portion of base cost recovered / recouped in current YOA
 Allowable expenditure that was not previously taken
into account (incurred in current YOA) 27
9
Taxation IV CGT
Proceeds (para 35(1))

 Proceeds = total amount received by or
accrued to a person iro disposal
 Amount?
 Face value vs present value?
 Received by or accrued to?
 In respect of disposal?
 Specific inclusions:
 Debt reduction or discharge (A owes B R10k. A sells
asset to C for R15k. R5k cash received by A and C settles A’s debt to
B. Proceeds = R5k cash + R10k debt discharge);
and
 Amount of compensation received by a
lessee from a lessor for improvements
effected to that property by lessee 28
Proceeds
 Para 35(1A): Proceeds for disposal of share
option issued by resident company in exchange
for shares in a foreign company per para
11(2)(b) will be MV of shares in foreign company
 Para 35(2): Value-shifting arrangement
 Proceeds is reduced by (para 35(3)):
 Amounts included in gross income or taxable
income, for example: recoupments
 Proceeds repaid/repayable to purchaser
 Reduction of proceeds because of a cancellation,
waiver, variation…
 Person entitled to Proceeds which are only
received after end of the YOA – treated as
Proceeds in YOA when entitled 29
Proceeds (paras 35(3)(a))

 Proceeds reduced by: Any amount of
Proceeds taken into account in Gross
Income or in calculating Taxable Income:
 s 8(4)(a)
 s 8(4)(k)
 s 8(4)(e),(eA)-(eE)
 s 8(5)
 s 19
 NOT reduced by s9C(5) clawback – not an
amount of proceeds included in gross income
(para 35(2)) as a result of this recoupment -
merely a recoupment of prior deduction 30
10
Taxation IV CGT
Value Shifting Arrangement Provisions

Paragraph Purpose
1 Defines a ‘value shifting arrangement’
11(1)(g) Deems there to be a disposal when there is a decrease in the
interest of a person in a company, partnership or trust as a result
of a ‘value shifting arrangement’
13(1)(f) Fixes the time of disposal as the date on which the values of the
person’s interest decreases
20(1)(h)(iv) Provides that the base cost of the asset must be determined under
paragraph 23
23(a) Specifies the formula to be used to determine base cost in the
hands of the person whose interests have decreased
23(b) Provides how base cost is to be determined in the hands of the
beneficiary of the ‘value shifting arrangement’
35(2) States how proceeds are to be determined
Source: SARS Comprehensive CGT Guide – Issue 5 31
Value shifting arrangement

 “Value shifting arrangement” (s1) means an
arrangement by which a person retains an interest in a
company, trust or partnership, but following a change in
the rights or entitlements of the interests in that
company, trust or partnership, the market value of the
interest of that person decreases and—
 (a) the value of the interest of a connected person
in relation to that person held directly or indirectly in
that company, trust or partnership increases; or
 (b) a connected person in relation to that person
acquires a direct or indirect interest in that company,
trust or partnership.
 The following are some examples of value shifting:
 Issue of shares at a discount, Variation of rights attaching to shares or
interests in land (for example, manipulating voting or dividend rights),
Buying back shares at below market value 32
Value Shifting Arrangement - Base

Cost – Para 23
 Para 23(a) deals with Base Cost of person
giving up interest
 Base Cost % =
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑑𝑖𝑠𝑝𝑜𝑠𝑎𝑙 − 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑓𝑡𝑒𝑟 𝑑𝑖𝑠𝑝𝑜𝑠𝑎𝑙
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑑𝑖𝑠𝑝𝑜𝑠𝑎𝑙
 New Base Cost = Base Cost % x Base Cost

of interest immediately prior to disposal
 Para 23(b) deals with Base Cost of person
acquiring interest
 Proceeds per the Value Shifting Arrangement +
any amounts paid 33
11
Taxation IV CGT
Value shifting arrangement - Example

 Bongo is the sole shareholder of Why (Pty) Ltd in which he holds 2
shares of R1 each. The retained income in the company amounts to
R99 998. The market value of the shares on 1 October 2017 is
R100 000 (disregard the impact of dividends tax on the share
valuation). The base cost of Bongo’s 2 shares on valuation date is
R50 000. On 1 October 2017, Why (Pty) Ltd issues a further share of
R1 to Bongo’s daughter, Cynthia, at a cost of R1.
 Base cost per formula (defn only – no calculations for ITC)

Source: SARS Comprehensive CGT Guide – Issue 5 34
 Step 1: Determine whether a ‘value shifting

arrangement has occurred
 The issue of shares to Cynthia constitutes a ‘value
shifting arrangement’ as defined in para 1 of the
Eighth Schedule in that:
 There is an arrangement
 Bongo has retained an interest in Why (Pty) Ltd
 There has been a change in the rights or entitlements in
the interests in Why (Pty) Ltd
 The change in interest occurred other than as a result of a
disposal at market value
 The market value of Bongo’s interest has decreased from
R100 000 to R66 666
 Cynthia (a relative to Bongo (daughter – within 3 degrees
of consanguinity and connected person)) has acquired an
interest in Why (Pty) Ltd 35
 Step 2: Determine Bongo’s Proceeds – para

11(1)(g) and para 35(2)
 Paragraph 11(1)(g) includes as a disposal: ‘the
decrease in value of a person’s interest in a
company, trust or partnership as a result of a value
shifting arrangement’
 Paragraph 35(2) provides for the proceed to be
determined as follows: The market value of the
person’s interests to which subparagraph 11(1)(g)
applies immediately prior to the disposal less the
market value of the person’s interests immediately
after the disposal, which amount shall be treated as
having been receive or accrued to that person
 MV before = R100 000, MV after = R66 667
 Proceeds = R33 333 36
12
Taxation IV CGT
 Step 3: Determine Bongo’s Base Cost under para

23(a)
 Applying the formula:
𝑅100 000 −𝑅66 667
 = 33%
𝑅100 000
 Base Cost attributable to disposal of Bongo’s interest =
R50 000 x 33% = R16 500
 Step 4: Determine Bongo’s capital gain
 Proceeds = R33 333,
 Base Cost = R16 500,
 Capital Gain = R16 833.
 Step 5: Determine Cynthia’s Base Cost under para
23(b)
 Cost to Cynthia = R1,
 Increase in value of Cynthia’s interest = R33 333,
 Revised Base Cost = R33 334.
37
Capital Gains Tax
Base cost
38
Base cost (para 20(1))

 Base cost of an asset is the sum of
expenditure actually incurred in respect of:
 Acquisition or creation
 Valuation for CGT purposes
 Directly attributable costs incurred on
acquisition or disposal eg. transfer cost,
advertising costs, sales commission, moving
costs, installation costs, portion of donations
tax (formula)
 Improvements
 VAT denied as input OR VAT paid but not
entitled to claim (not a VAT vendor)
 Establishing or defending legal title 39
13
Taxation IV CGT
Base cost
 Note:
 Cannot take any amount into account twice and
specific provision overrides general (para 21, similar
to section 23B in the Income Tax Act)
 Onus is on taxpayer to establish base cost
 Assets acquired before 1 Oct 2001 are pre-CGT assets
 Base cost = valuation date value (1/10/2001) plus

expenditure incurred on or after 1 Oct 2001
 Special rules apply to:
 Assets inherited from a non-resident - use MV plus
related expenditure incurred by executor, except if SA
source assets
 Assets received from non-resident (donation/not at
arm’s length/not measurable) - use MV, except if SA
source assets
40

 Certain amounts included in gross income must be added to base
cost
 One-third of interest per s24J (excluding interest as per
s24O (Financial Instruments module)) on loan for
expenditure in items (a) or (e) for listed share or interest in
collective investment scheme (para 20(1)(g)) – NEW from
3rd year
 s 8C - MV (which was used to determine gain or loss for
income tax purposes)
 Leased asset – s8(5) recoupment that was included in
income (as was applied to reduce purchase price)
 Lease improvements – amount included in gross income
para (h) less any allowance under s 11(h)
 Fringe benefit assets – value placed on asset per Seventh
Schedule for GI para (i) inclusion
 Share in a CFC – s9D inclusion less taxable capital gain plus
net capital gain less exempt foreign dividends 41
Example – fringe benefit asset
An employee acquires a second-hand

computer from his employer for R3 000 (the
consideration paid) when the market value
thereof is R5 000.
Solution:
Fringe benefit (included in gross income) R2 000
Base Cost of asset:
 Actual cost incurred R3 000
 Amount included in GI para (i) R2 000
R5 000
42
14
Taxation IV CGT

 Excludes
 Borrowing costs, including s24J
interest (para 20(2)(a))
 Other holding costs like insurance,
security/protection, repairs,
maintenance, rates, taxes (para
20(2)(b))
 Remember paragraph 20(1)(g)
inclusion of interest
43

 Reduce base cost with:
 Expenditure already allowed or deemed to be
allowed as a deduction for income tax purposes
 Expenditure allowed on qualifying shares under
section 9C(5) that was not included in income
 Amounts that have been reduced or recovered or
paid by another person, BUT only to the extent it is
not:
 Taxed as a recoupment (ito s8(4)(a)/GI para (j))
 Applied in terms of section 19 (refer later slides)

note: if underlying expenditure is reduced or
recovered, para 20(3)(b) applies but if debt used
to fund underlying expenditure is reduced or
recovered then para 12A applies (para 12A takes
precedence over para 20(3)) 44
Base cost (para 20(3)(a))
 Amounts allowed or deemed to be

allowed as a deduction in determining TI:
 s 11(o)
 s 11(e), 11(gB), 11(gC)
 s 12B, 12C, 12E
 s 13, 13sex, 13quin
 s 12NA
45
15
Taxation IV CGT
Base cost example

Mr X buys an asset for R22 000 cash. After a dispute on
the quality of the product, the seller repays Mr X R3 000
of the selling price in an attempt to keep Mr X as a
client. Mr X later sells the asset for R25 000.
Calculate the capital gain/loss on disposal?

Proceeds R25 000
Less: Base Cost (R19 000)
Purchase price R22 000
Less: Amount recovered (R3 000)
Capital gain R6 000
Seller?
46
Example: Sale of machine
Cost of machine R100 000

Section 12C allowances claimed R80 000
Selling price R115 000
Calculate the normal tax inclusion and

capital gain arising on the sale
47
Example: Sale of machine

Income Tax:
Selling price R115k, limited to original cost R100k R100 000
Less: Tax value (Cost R100k less allowances claimed of R80k) (R20 000)
Section 8(4)(a) recoupment R80 000
CGT:
Proceeds R35 000
Amount received/accrued of R115k
Less: recoupment of R80k
Less: Base Cost (R20 000)
Cost of machine R100k
Less: s12C allowances of R80k
Capital Gain R15 000
48
16
Taxation IV CGT
Pre-CGT assets
(para 25 to 28)
 Base cost is sum of

 Valuation date value (VDV) (para 26 - 28)
 Subsequent expenditure as permitted by
para 20
 Identical assets
 Para 32(3A) applies rather than para 25
 Refer to flow diagram in SILKE

 Note: TABC will be given
49
Pre-CGT assets
 Proceeds exceed total allowable
expenditure (pre + post) (para 26(1))
 Elect: MV (on VD) or 20% of proceeds (on or after
Valuation Date) or TABC
 If MV selected but proceeds are < MV, use
proceeds less post 1/10/01 expenditure as VDV
– para 26(3)
 Make election in year of disposal
 MV only if asset was valued within 3 yrs after
1/10/01 OR was published by SARS OR was
acquired from a spouse that adopted MV
 TABC not available if pre 1/10/01 expenditure
not known (para 26(2))
 TABC – as calculated in terms of para 30 50
Pre-CGT assets
 Proceeds do not exceed total allowable expenditure
(pre + post) (para 27(1))
 No election
 If MV determined or published and
 Pre-1/10/01 expenditure ≥ proceeds AND >MV,
THEN
 VDV is higher of: MV OR Proceeds less post 1/10/01
expenditure (Para 27(3)(a))
 Pre-1/10/01 expenditure < proceeds OR ≤MV THEN
 VDV is lower of: MV OR TABC (Para 27(3)(b))
 If MV not determined or published, use TABC (Para 27(4))
 Does not apply to interest bearing financial instruments and
identical asset where weighted average used (para 27(2))
51
17
Taxation IV CGT
Identical assets (para 32)

 Applies to assets which form part of a holding of
identical assets (para 31(1))
 What are these? (para 32(2))
 Each asset would realise same amount irrespective of
which one is sold, AND
 Are not able to be individually distinguished apart
from any identifying numbers
 Base cost: (paragraphs 32(3), (3A) & (3B))
 Choose specific identification OR FIFO OR weighted
average
 Chosen valuation method must be used until all
assets of a particular class are disposed (para 32(6))
52
Identical assets
 Weighted average method (para 32(3A))
 Must use moving weighted average (para 32(4)(a))
 i.e. (VDV (MV) + post 1/10/01 expenditure)
DIVIDED BY number on hand, ELSE apply para 32(4)(b)
 May only use for all assets as listed below (para
32(3A)):
 Only for:
 Local and foreign listed shares (para 32(3A)(a)),
 Interest in collective investment schemes (para
32(3A)(b)),
 Gold or platinum coins with published prices (para
32(3A)(c)),
 Listed section 24J instruments (para 32(3A)(d)).
 Para 32(3B) – s29A excluded, so exclude 53
Identical assets example

Mr X owns the following shares (see table below) in a listed
company as a long term investment. The shares were
acquired on:
Date purchased No. Cost per PI Total cost
1/10/2012 25 R1.00 R25
1/12/2013 10 R1.20 R12
1/03/2014 50 R2.00 R100
1/08/2015 15 R2.40 R36
Total 100 R173
Sells 20 shares on 1/3/2017. The 20 shares comprising 5 of

the shares acquired on 1/12/2013 and 15 of the shares
acquired on 1/3/2014.
Calculate the base cost to be used for the CGT calculation?

54
18
Taxation IV CGT
 Shares = identical assets

 Options available:
 Specific identification
 FIFO
 Weighted average
 Therefore, calculate the CGT position for
all 3 options = Choose the best option
55

 Specific identification:
= (R1.2 * 5) + (R2 *15)
= R36
 FIFO:
= 20 shares * R1 per share
= R20
 Weighted average:
= (R173) / 100 * 20 shares
= R34.6
56
Part disposals (para 33)
 What is a part disposal?

 Para 33(1): Apportion base cost/MV on VD in
ratio of MV of part disposed of to entire MV unless
directly attributable to part disposed:
 i.e. Base Cost/MV on VD of entire asset per
29(4) MULTIPLIED BY MV of part disposed
DIVIDED BY MV of entire asset
 Para 33(2): Where expenditure (per para 20) or
MV can be directly attributed to the part of asset
disposed, apportionment in subparagraph 1 does
not apply.
57
19
Taxation IV CGT
Part disposals (para 33)

 Does not apply to (para 33(3)):
 Option granted in respect of an asset;
 Granting, variation or cession of a right of use or

occupation if no proceeds received / accrued;
 The improvement or enhancement of immovable
property which that person leased from a lessor –
deferred till end of lease; or
 The replacement of part of the asset in repairing
the asset
 Para 33(4): Right of use/occupation disposed: use
Proceeds of part not MV in para 33(1) formula
 Para 33(5): If adopted 20% of proceeds method per
para 26(1)(b) for VDV, use same method for VDV of
remaining part of asset
58
Example: Part disposal
Mr A paid R800 000 for 2ha of property. It cost Mr

A, R100 000, to sub-divide and applied for sectional
title for 4 equal size plots. Mr A then sold 1 plot at
market value for R650 000 at a time when the
market value of the 2ha property was R3 000 000.
CGT:
Proceeds R650 000
Less Base Cost R195 000
[(R800 000+R100 000)*650 000/3 000 000]
Capital gain R455 000
59
60
20
Taxation IV CGT
61
Capital Gains Tax
Special provisions
Various
62
Leasehold improvements
 Disposal by lessee of bare dominium (retains right

of use for period of use)
 Disposal deferred to expiry or termination of lease
 Lessee:
 Proceeds = compensation received for
improvements from lessor (specific inclusion
under para 35(1)(b)) less recoupments or
deductions claimed
 Base cost = expenditure incurred LESS
deductions claimed under section 11(g) (Note:
no deduction would have been claimed for
voluntary improvements) 63
21
Taxation IV CGT
Leasehold improvements
 Lessor:
 Acquires improvements – Base Cost
EQUALS amount included in gross
income under GI para (h) LESS
allowances claimed under section 11(h)
PLUS compensation paid to lessee for
improvements.
 Note: for voluntary improvements by
lessee, lessor did not incur any
expenditure (no Gross Income) hence
base cost of improvements is Rnil 64
Unquantified amounts (s 24M)

 Disposal (proceeds) or acquisition (base
cost) for consideration that is not
quantifiable:
 Defer recognition until amount is quantified
 Applies for both revenue and capital purposes
 Capital loss cannot be recognised until all
amounts have been quantified – para 39A
 Eg. proceeds (full or portion) only accrued in
future Years of Assessment
 Ring-fence capital loss till all proceeds accrue
or becomes certain no further proceeds will
accrue
65
Para 38 disposals
 Para 38(1): Disposal to anyone
 as donation OR
 for consideration not measurable in money
OR
 Disposal to connected person for non-arm’s length
consideration
THEN
 Proceeds deemed = market value
 Base cost for other person deemed = market value (38(1)(b))
Exclusions to this rule (para 38(2)):
 s 8B qualifying equity share
 s 40CA asset acquired for shares
 Transfer between spouses (para 67)
 And others… 66
22
Taxation IV CGT
Para 39
Connected person “clogged loss”
 Para 39(1): Disposal of asset to:
 Person that was a connected person immediately
before disposal OR
 Member of the same group of companies
immediately after disposal OR
 Trust with a beneficiary that is part of the same
group of companies as disposer immediately after
disposal
 Capital loss is disregarded and ring-fenced (para
39(1)) – can only be used to reduce (current or
future) capital gains on disposals to same person as
long as they are still connected persons (para 39(2))
67
Para 39
Connected person “clogged loss”
 Specific rules:
 Connected person in relation to natural
person does not include a relative other
than a parent, child, stepchild, brother,
sister, grandchild or grandparent (para
39(3))
 Trusts and beneficiaries - right,
marketable security or equity instrument
(per s8A or s8C) (para 39(4))
68
Connected persons “clogged loss” - example

 Y1: A Ltd sold fixed property having a base cost
of R1 000 000 to G (Pty) Ltd, its wholly-owned
subsidiary, at MV of R500 000.
 Y2: A Ltd sold another fixed property to G (Pty)
Ltd with a base cost of R500 000 and a market
value of R550 000. This sale was effected at a
price of R550 000 due to the fact that A Ltd had
four unrelated interested buyers.
 Y3: A Ltd sold all the shares held in G (Pty) Ltd
to a foreign developer not linked to A Ltd (No
capital gain or loss – no CGT calculation
required).
 Y4: A Ltd sold a shopping complex with a base
cost of R1,5m to G (Pty) Ltd at a market related
price of R1,8m.
69
23
Taxation IV CGT
Connected persons clogged loss example

Year 1
Proceeds R500 000
Base cost (R1 000 000)
Capital loss (R500 000)
(Para 39 applies – ring-fence loss – R500 000)
Year 2
Proceeds R550 000
Base cost (R500 000)
(Gain set-off against para 39 loss) (R500 000-R50 000 = R450 000 c/f)
Year 4
Proceeds R1 800 000
Base cost (R1 500 000)
(A Ltd and G (Pty) Ltd are no longer connected - R450 000 loss can no
longer be used and R300 000 will be included with sum of gains for
YOA) 70
Limitation of Losses (Part V)

 Only capital LOSS is disregarded - capital gain has
normal CGT consequences
 Para 16: Intangible assets (para 16(2) defn)
acquired prior to 1/10/2001 (valuation date) from a
connected person or per a business taken over
 Para 17: Forfeited deposits on asset not exclusively
used for business purposes (note exclusion below)
 Para 18: Disposal of options to acquire or dispose
of assets not exclusively used for business purposes
which are allowed to expire or disposed of (other
than being exercised)
 Does not apply iro options to acquire / dispose of
gold/platinum coins, immovable property (other than
primary residence), financial instruments, a right or
interest in these assets 71
Capital Gains Tax
Special provisions
Debt related transactions
72
24
Taxation IV CGT
Debt substitution (para 34)

 Debt settled by disposing of an asset to a creditor
 Debtor: Disposal of asset
 Proceeds = amount by which debt is reduced
 Base cost = normal rules
 Creditor: Acquisition of asset AND disposal of asset

(receivable)
 New Asset
 Base cost = MV
 Existing asset
 Proceeds = MV of asset received
 Base cost = amount by which receivable was

reduced
73
Debt substitution example

X (Pty) Ltd owes R400k to B (Pty) Ltd. In the full and final
settlement of the outstanding debt, X (Pty) Ltd transfers an asset
with a market value of R380k to B (Pty) Ltd. X (Pty) Ltd originally
acquired the asset for R350k. No further expenditure was
incurred or deductions claimed.
Solution:
X (Pty) Ltd disposed of asset (para 35(1)(a))
Proceeds (R400 000) – Base Cost (R350 000)
= Capital gain R50 000
B (Pty) Ltd is deemed to have acquired an asset with a value of
R380 000 (para 34) (used as base cost of new asset) and
disposed of another asset
Proceeds (R380 000) – Base Cost (R400 000)
= Capital loss R20 000 (not connected persons)
Note: No s11(i) deduction 74
Reduction of debt (para 12A and s19)

 NEW RULES FOR DEBT BENEFITS DUE TO
CONCESSIONS OR COMPROMISES IN RESPECT OF A
DEBT FOR YEARS OF ASSESSMENTS COMMENCING
ON OR AFTER 1 JANUARY 2018
 See section 19(1) for definitions
 Debt: Amount owed by a person excluding tax debt (s1 of
Tax Administration Act) and interest [only capital portion]
 Concession or compromise: Any arrangement in terms of
which:
 (a) any -
 (i) term or condition applying to the debt is changed or waived; or
 (ii) obligation is substituted for the obligation in terms of which that debt is owed
(novation = substitution of new contract in place of old contract) [for example:
write-off of a bad debt, compromise with creditors or liquidation]
 (b) A debt owed by a company is settled by (i) being converted to
shares in that company or (ii) applying proceeds from shares issued
by that company 75
25
Taxation IV CGT

 Debt benefit: Any amount by which the face value of the
debt (before entering into a concession or compromise)
EXCEEDS:
 (a)(i) For an arrangement where the terms or conditions regarding
the debt have been amended or the obligation has been replaced –
the market value of the debt
 (a)(ii) Where shares are acquired in exchange for debt and acquirer
of shares was not previously a shareholder – market value of shares
acquired
 (b) Where shares are acquired in exchange for debt and acquirer of
shares was previously a shareholder – market value of shares after
concession or compromise LESS market value of shares held in
company before concession or compromise
 LESS any increase in the market value of shares held in another
company in the same group of companies due to the concession
 Amount of the debt benefit = Face value of debt claim prior
to arrangement LESS Market value of debt/shares because
of the arrangement 76

 Debt benefit example: Ace (Pty) Ltd owes a creditor R550 000
for a loan used to purchase trading stock 2 years ago. Total
interest to date is R50 000.
 On 25 January 2018, Ace agrees with the creditor to pay 20% of
the outstanding capital and have the rest written off as a bad
debt.
 The year of assessment of Ace ends on 31 December 2018.
 What is the debt benefit to Ace?
ZAR
Amount of debt (excluding interest) 500 000
LESS capital amount repaid (500 000 x 20%) (100 000)
Face value of claim before concession 400 000
LESS market value of debt after concession 0
DEBT BENEFIT TO ACE 400 000
 Would this change if the loan was used to acquire a capital asset?
77
 Definitions continued:
 Capital asset: Asset that is not trading stock
 Allowance asset: Capital asset on which
allowances can be claimed
 Group of companies: as per section 41 (to
be dealt with in Mergers and Acquisitions
Module)
78
26
Taxation IV CGT
Section 19 and IN 91
 Section 19(1): Definitions
 Section 19(2): Application: Debt benefit arises and debt
used to fund expenditure which qualified for tax deduction
or allowance
 Section 19(3): Debt benefit arises, amount of debt used
to fund trading stock still on hand:
 Reduce s11(a), s22(2) and s22(1) as applicable
 Section 19(4): Where amount left after applying section

19(3), excess is a section 8(4)(a) recoupment
 Section 19(5): Debt benefit arises, used to fund
expenditure other than trading stock on hand or allowance
asset – section 8(4)(a) recoupment (generally tax
deductible expenses or trading stock not on hand.)
 Section 19(8): Instances where s19 will NOT apply
 Per ITC: Context will indicate whether it is a commercial
decision or a donation
79
Section 19 Reduction Amounts –

Multiple Subsections
 Depending on the circumstances prevailing when the debt is reduced, section
19(3) may be applied to reduce the amount taken into account under more
than one of the sections mentioned.
 For example, if the debt is reduced in the same year in which the
trading stock was acquired it is necessary to reduce the expenditure
allowed under section 11(a) by the debt benefit amount and, assuming the
trading stock is still held and not disposed at the end of the year of
assessment, to reduce the related closing stock amount (s22(1)) by the
same amount.
 The reduction of both the amounts taken into account under section 11(a)
and section 22(1) is necessary so as to ensure that an amount that is no
longer matched by the corresponding deduction of expenditure incurred on
acquisition of the trading stock in that year of assessment is not included in
income as part of trading stock.
 Similarly, if the debt is reduced in a year of assessment following the year
in which the trading stock was acquired and it is still held and not disposed
of at the end of the year of assessment, both the amounts taken into
account under section 22(1) and section 22(2) will need to be reduced.
80

 See para 12A(1) for definitions
 Definitions are the same in para 12A(1)
as in section 19
 Para 12A focus is on capital assets and
allowance assets
81
27
Taxation IV CGT
Is there a debt
benefit?
YES NO
Is the debt benefit

specifically Para 12A not
excluded by para applicable.
12A(6)?
NO YES
What was the debt

benefit used for? Para 12A is not
Trading stock = s19, applicable.
Capital asset = para 12A
82
Source: SILKE 2018, page 563

 Where a “debt benefit” arises AND
 Debt used to fund expenditure in respect of allowance asset
OR other than expenditure where deduction or allowance is
granted (para 12A(2)) THEN
 The creation of a “debt benefit” triggers para 12A (CGT)
and/or section 19 (income tax) for DEBTOR
 Debt was used to fund:
 Capital asset on hand (not qualifying for allowances):
 1: Reduce base cost of capital asset (para 12A(3))
 2: Reduce assessed capital losses (para 12A(4))
 Allowance asset on hand (capital asset with

allowances):
 1: Reduce base cost of capital asset (para 12A(3))
 2: Recoup allowances claimed (s19(6), s8(4)(a)) 83

 Where the capital asset (other than
an allowance asset) is no longer
held at the date of the debt
reduction:
 Reduce assessed capital loss (para
12A(4)(b)(ii)).
 Allowance assets no longer held at
the date of the debt reduction will
be dealt with in terms of section
19(6) – recoupment per s8(4)(a). 84
28
Taxation IV CGT
Reduction of debt (para 12A)
Held on date of debt benefit Not held on date

of debt benefit
Capital Asset (1) Reduce Base Cost to R0 (1) Reduce assessed
(2) Any excess is used to reduce capital loss
assessed capital loss
Allowance asset (1) Reduce Base Cost to R0 (1) Section 19(6)
(2) Any excess is a s19(6) read read with s8(4)(a)
with s8(4)(a) recoupment recoupment
85
Reduction of debt
 Debt was used to fund Pre-valuation date
asset (para 12A(5))
 1: Deemed disposal of asset
immediately before debt reduction at
market value
 2: Immediate reacquisition of asset on
same date at
 Same market value
 Less: capital gain/Plus: capital loss
 PURPOSE: To re-establish base cost, THEN

follow normal para 12A rules 86
Reduction of debt – Section 19(7)

 Limitation of deductions and allowances on allowance assets
 Section 19(7) provides that the aggregate amount of
deductions and allowances that may be claimed in respect of
an allowance asset may not exceed an amount equal to the
aggregate of expenditure incurred in respect of the
acquisition of the asset, reduced by an amount equal to the
sum of:
 The debt benefit in respect of that debt; AND
 The aggregate amount of deductions and allowances previously
allowed to that person in respect of that asset.
 The deduction and allowances referred to in section 19(7)
that are subject to possible limitation include depreciation
allowances and a deduction for the loss arising on the
alienation, loss or destruction of an asset under section
11(o).
Source: SARS Interpretation Note 91 87
29
Taxation IV CGT

 Does not apply (para 12A(6)):
 (a) If debt is owed to a deceased estate AND is
reduced in favour of a heir/legatee AND
constitutes property of the estate that is subject
to estate duty (Deceased Estates Module)
 (b) If debt qualifies as a donation or deemed
donation subject to donations tax
 (c) If debt reduction or cancellation stems from
an employer/employee relationship – the amount
is generally reviewed as taxable salary subject to
employees’ tax (Seventh Schedule para 2(h))
88

 Does not apply:
 (d) Where the debtor and creditor are members of the same group of
companies and debtor is a dormant company, UNLESS
 Debt was acquired to fund an asset subsequently disposed of by that
company by way of transaction per s42/44/45/47 (Mergers and Acquisitions
Module) OR
 Debt was incurred to settle or renew any debt incurred by another group
company
 Dormant company: Company not carrying on a trade during year of
assessment of debt benefit and preceding year of assessment
 (e) Where debtor is a company and is a connected person to a creditor,
AND debt is reduced in anticipation of liquidation etc of debtor to extent
debt benefit amount does not exceed para 20 expenditure of connected
person, UNLESS
 Debtor and creditor only became connected persons after debt arose
AND Transaction is part of a scheme to avoid tax OR
 Where the debtor has not take the necessary steps within 36 months to
liquidate/deregister OR the debtor has invalidated any of the above
steps resulting in no liquidation/deregistration OR debtor has withdrawn
any step to liquidate/deregister 89
 Does not apply:

 (f) Where intra-group debts are reduced or settled by
issuing shares in the debtor company and the debtor and
creditor are members of the same group of companies,
UNLESS
 The debt was acquired to settle or renew any debt incurred by a
company that was not a member of the same group of companies
at the time the debt was incurred, OR
 The debtor company is not a member of the group of companies
at the time that the shares are issued
90
30
Taxation IV CGT
Reduction of debt – Example 1

ABC Co borrows R2.5 million from Loan-Shark to buy a
machine used in a process of manufacture. Capital
allowances claimed were R1.5 million resulting in a base cost
of R1 million (R2.5 – R1.5). ABC Co cannot repay loan and
Loan-Shark waives:
 R1 million of the loan OR R2 million of the loan.
Example 1 SOLUTION:
Debt benefit arises and debt used to fund an allowance
asset:
1. Reduce base cost of R1 million to nil (para 12A). Debt
benefit amount taken into account fully. No further
adjustment.
2. Reduce base cost to Rnil (para 12A). Excess treated as a
recoupment of capital allowances (R1 million recoupment
included in gross income (per s19(6) and s8(4)(a)).
s19(7): R2.5m – R2m – R1.5m ltd to 0 = 0. 91

Taxpayer purchases vacant land costing R2 million from Mr
X and pays Mr X in cash with money borrowed from a third
party. Mr X refunds R500 000 of the purchase price.
SOLUTION:
 The R500 000 is a reduction of the cost of underlying
asset and is not a debt benefit. The R500 000 reduces
the base cost of the land in terms of para 20(3)(b), not
para 12A.
 WHAT IF: the third party loan was reduced by R500k?
 Then the base cost of land would be reduced by R500 000 in
terms of para 12A.
 WHAT IF: land was sold but loan was still outstanding
and was later waived?
 Then reduce any assessed capital loss by R500 000 (no base
cost to reduce as land not on hand). 92

Company A and Company B do not form part of the same
group of companies. Company A’s year of assessment ends
on the last day of December.
2017 Year of Assessment:
Company A acquired a second-hand machinery at a cost of
R1 million on loan account from Company B on 1 March
2017. Company A is entitled to an allowance of 20% a year
on the cost price of the asset under section 12C(1).
2018 Year of Assessment:
On 1 March 2018 Company B waived the outstanding
balance on the loan account, which at that stage stood at
R500 000, because of Company A’s adverse financial
position.
Source: SARS Interpretation Note 91 93
31
Taxation IV CGT
Example 3 Solution
 Application of paragraph 12A(3):
 Company A was granted allowances under section 12C(1)
of R200 000 a year for the 2017 and 2018 years of
assessment. At the time of the reduction of the debt, the
base cost of the machinery (per para 20) was R600 000
(R1 million purchase price – R400 000 s12C)
 Under para 12A(3) the base cost of the machinery
(R600 000) was reduced by R500 000 (debt benefit) to
R100 000 for the purposes of paragraph 20, as the asset
was held at the time of the reduction of the debt.
 Application of section 19(6):
 Section 19(6) does not apply, since the base cost of the
asset exceeded the debt benefit. As a result para 12A(3)
applied to the full debt benefit amount.
94
Example 3 Solution - Continued

 Application of section 19(7):
 Under section 19(7) the allowances that can be
claimed on the machine after the reduction of
debt will be limited to R100 000, being the
aggregate of the expenditure incurred of
R1 million reduced by R900 000 (the debt benefit
amount of R500 000 plus the aggregate
allowances previously granted of R400 000).
 The allowance that may be claimed under section
12C(1) is, therefore, limited to R100 000 for the
2019 year of assessment and then no further
allowances will be allowed on the asset.
95
Reduction of debt (para 56)

 Implications for CREDITOR on debt reduction
 Creditor can claim a capital loss on disposal of debt
claim, HOWEVER:
 Where the debtor and creditor are connected persons,
 Capital loss must be disregarded (para 56(1)), BUT do
not disregard to extent that (per para 56(2)):
 Debt reduction was taken into account by debtor
to reduce base cost of asset / reduce assessed
capital loss / included in gross income i.e. para 12A
or s19 implications; OR
 Was taken into account by an acquirer of the debt
in their gross income; OR
 Debt is a CG which creditor proves included in
aggregate CG/CL of acquirer of debt. 96
32
Taxation IV CGT
Capital Gains Tax
Special provisions
Share transactions
97
Company distributions
(para 74, 75, 76B, 77)
 Link to Dividends Tax
 Applies where a company distributes cash or an
assets in respect of shares held.
 Note: accounting treatment does not matter –
determine whether a dividend or CTC payment
for tax purposes
 If CTC payment, then return of capital or foreign
return of capital provisions may apply
(defined in section 1)
 “Date of Distribution” definition – para 74
98
 Company level consequences:
 Asset distributed is a disposal at that date at
market value
 Note: s22(8) or s8(4)(k) recoupments
 Note: Paragraph 39 if company and shareholder
are connected
 Company must notify shareholder in writing if
payment is a Return of Capital (RoC).
 Company must record reduction in CTC balance
 Account for dividends tax of “dividend” portion
 Shareholder level consequences:
 If asset is distributed, asset deemed to be disposed by
co at MV and acquired at its market value (para 75)
99
33
Taxation IV CGT
RoC is defined in section 1 and is essentially:
 amount transferred by resident co for benefit or on behalf of any
person iro any share in that company (beneficial owner)
 to extent it reduces CTC of the co and
 is either a distribution or share buy-back.
 Excludes distribution of actual shares and general buy-backs by
JSE listed companies.
Foreign RoC - defined in s1, similar to foreign dividend definition
 amount paid or payable by foreign co iro any share
 which is treated as a distribution or similar by that foreign co
(other than amount that constitutes a foreign dividend)
 in terms of tax laws of country of PoEM or company law of
country of incorporation/formation/establishment (where there
are no tax laws in PoEM country)
 Excludes amounts that are deductible for foreign tax purposes
 Excludes actual shares distributed 100
(para 74, 75, 76B, 77)
 Winding up, liquidation or deregistration (para 77)
 Holder of shares treated as having disposed of all
shares at the earlier of:
 Date of dissolution/deregistration
 Liquidator declares in writing that no further distributions
 RoC/ FRoC after this date = capital gain
 Capitalisation shares (s 40C) (Mergers Module)
 Deemed acquisition at Rnil thus Rnil base cost
 Substitutive shares:
 Depends on scenario
 Note: s43 not examinable (linked units)
101
Company Distributions – Paragraph 76

 Para 76(1):
 RoC or FRoC by way of cash or asset in specie
(other than in terms of s46) is received by or
accrues to a shareholder in respect of that share,
holder must where date of distributions occurs:
 a.) Before valuation date: reduce Base Cost by
cash or MV of asset;
 b.) On or after valuation date but before 1 Oct
2007: treat cash or MV of asset as proceeds when
disposed;
 c.) On or after 1 Oct 2007 but before 1 Apr 2012:
treat cash or MV of asset as proceeds when partly
disposed per para 76A.
102
34
Taxation IV CGT
Company Distributions – Paragraph 76

 Para 76(2):
 Where weighted average method per para 32(3A)(a) used
in respect of RoC or FRoC received or accrued on or after
valuation date but before 1 Oct 2007, THEN weighted
average base cost determined by:
 (a) Deducting cash or MV of asset from Base Cost of
shares held when RoC or FRoC received or accrued; AND
 (b) dividing result by number of shares held when RoC or
FRoC received or accrued.
 Para 76(4):
 Every company that makes a distribution to any other
person; and any person that pays a distribution on behalf
of a company MUST
 On or after 1 April 2012, notify the person, in writing, the
extent to which the distribution constitutes a return of
capital. 103
Company Distributions – Paragraph 76A

 Para 76A(1):
 RoC or FRoC by way of cash or asset in specie (other than
in terms of s46) is received by or accrues to a shareholder
in respect of a share; AND
 Received or accrued on or after 1 October 2007 and before
1 April 2012, THEN
 Shareholder deemed to have disposed part of share on
date of receipt or accrual of the RoC or FRoC.
 Para 76A(1A):
 RoC or FRoC by way of cash or asset in specie (other than
in terms of s46) is received by or accrues to a shareholder
in respect of a share; AND
 Received or accrued on or after valuation date but before 1
October 2007 AND not disposed before 1 April 2012,
THEN
 RoC or FRoC treated as distributed on 1 April 2012. 104
Company Distributions – Paragraph 76A

 Para 76A(2):
 If para 76(2) applied and Base Cost is
negative, THEN
 Shareholder has CG on 31 March 2012 equal
to negative value; AND
 Base Cost as at 31 March 2012 is Rnil.
 Para 76A(3):
 For para 33(1), MV of part disposed equal to
cash or MV of asset received or accrued by
way of the RoC or the FRoC.
105
35
Taxation IV CGT
Company Distributions – Paragraph 76B

 Para 76B(1) – Date of acquisition and Base Cost:
 Where a RoC or FRoC by way of cash or asset in
specie (other than in terms of s46) is received by or
accrues to a shareholder in respect of that share; AND
 RoC or FRoC received or accrues on or after 1 April
2012 AND prior to disposal of share; AND
 Share is a pre-valuation date asset, THEN
 Holder of share treated as having disposed of share

immediately before RoC or FRoC for MV; AND
 Immediately re-acquired share at expenditure of MV
 LESS any CG if share had been disposed at MV; OR
 PLUS any CL if share had been disposed at MV
 Which is then considered para 20 expenditure.
 >MV = Ruling price on last business day PLUS RoC or FRoC
 NOTE: Then apply paragraph 76B(2). 106
Company Distributions – Paragraph 76B

 Para 76B(2):
 Where a RoC or FRoC by way of cash or asset in
specie (other than in terms of s46) is received by or
accrues to a shareholder in respect of that share;
AND
 RoC or FRoC received or accrues on or after 1 April
2012 AND prior to disposal of share, THEN
 Holder of shares to reduce Base Cost by amount of
cash or MV of asset on date of receipt or accrual.
 Para 76B(3):
 Where RoC or FRoC in para 76B(2) exceeds
expenditure of share (Base Cost), THEN
 Excess treated as CG in YOA in which RoC or FRoC is
received or accrues to holder of share.
107
Assets acquired in exchange for issue

of shares (s 24BA, 40CA and 42)
 Refer to Module on Mergers and Acquisitions
 Section 40 CA – Asset acquired for shares given
up, then asset acquired at MV of shares (or amount
of debt of debt issued)
 Section 24BA – deemed capital gain and adjusted
base cost OR deemed dividend in specie if
transaction not at arm’s length (note exclusions)
 Section 42 – roll over base cost and acquisition
date for asset and same base cost and acquisition
date applied to shares
108
36
Taxation IV CGT
Section 9C disposal of shares

 Applies to disposal or deemed disposal of
 Equity shares (section 1 definition)
 Held for a continuous period of at least 3 years
immediately prior to disposal
 Irrespective of whether held as capital asset or
trading stock
 Excludes:
 Interest in a share block company and unlisted
foreign share
 Recoup expenditure previously claimed as a
deduction (section 9C(5) clawback)
 Treat amounts received/accrued (other than dividend
or foreign dividend) as capital in nature
109

 Identical shares – apply FIFO to determine period of
holding
 If shares were previously substituted, treat
substituted shares as one and the same if:
 Participation rights and interests remain
unchanged and
 No consideration was given for substituted shares
 Note: capitalisation shares have a cost of Rnil
 Asset for share transactions (section 42) – period of
holding calculated from date of transaction unless
“asset” is the section 9C equity share, then use
original (rolled over) acquisition date (refer to
Module on Mergers) 110

 Section 9C does not apply:
 Taxpayer and company are connected persons (note
wider definition of conn person)
 AND
 > 50% of MV of shares directly or indirectly attributable
to immovable prop WHICH IS NOT
 held directly or indirectly by unconnected person OR
held for continuous period of more than 3 years
 OR
 Company acquired an asset within 3 years prior to
disposal and amounts were payable by a person to
another person (other than company) for right of use
while asset was held by the company
 See also: Interpretation Note 43
111
37
Taxation IV CGT
Dividend stripping (para 19)

 Anti-avoidance provision when shares are
disposed of at a loss
 Disposal of share in a company as a result of
share buy-back OR liquidation of company
(para 19(1)(a)):
 Disregard capital loss to extent of “exempt
dividend” (para 19(3))
 Exempt dividend = dividend (local or
foreign) not subject to dividends tax (Part
VIII of Chapter II) AND normal tax; AND
 Received or accrued iro THAT share within
18 months prior to OR as part of disposal
112
Dividend stripping (para 19)

 Acquisition of a share in a company, extraction of a
dividend and subsequent disposal of share (para
19(1)(b)) (per Act, all other circumstances other
than para 19(1)(a)):
 Disregard capital loss to extent of
“extraordinary exempt dividends” (para 19(3))
 Extraordinary exempt dividends = exempt
dividend (as defined) that was received/accrued
in respected of THAT share as part of disposal
OR within 18 months prior to disposal that
exceeds 15% of the proceeds on disposal
NOTE: Refer exclusions from 18 month calculation –
para 19(3)
113
Dividend stripping example

SACo acquired 100 shares in J Ltd (resident company) for R100k
on 1/3/2016. On 1/4/2017, J Ltd buys back 10% shares from all
shareholders. The directors indicated that 75% of the payment
was a dividend and 25% a return of capital. SACo received R20k
in total (in respect of shares that were bought back). On
30/6/2017 SACo received a dividend of R40k. On 1/7/2017 SACo
sells 50% of the shares for R25k. Calculate the CGT implication
for the YOA ended 12/2017.
Solution:
Proceeds R5k (1/4*20k) Proceeds R25k
Base cost (R10k) Base cost (R45k)
Capital loss (R5k) Capital loss (R20k)
Exempt dividend = R15k Extraordinary exempt div
Hence R5k loss disregarded = R20k – (15%*R25k) =
R16.25k hence disregard
114
R16.25k of loss
38
Taxation IV CGT
Reacquired financial instruments (para 42)

 NB: applies to “financial instruments” and not just shares
 Applies to :
 disposals of financial instruments at a CAPITAL LOSS
AND
 that person or connected person acquires or enters
contract to acquire financial instrument of same kind
and same quality
 within 45 days before and 45 days after disposal
 Deem proceeds to = base cost
 Connected person acquiring can add actual capital loss of
first person i.e. added to base cost of “replacement asset”
 Ignore days under para 42(2)
 Note connected person definition under para 42(3) and
exclusion under para 42(4) 115
Foreign share disposals (para 64B)

 Person must disregard capital gain or loss on disposal of
an equity share in any foreign company if immediately
before disposal that person together with any other
person in same group of companies:
 (cumulatively) held at least 10% of equity shares
and voting rights of foreign company AND
 (cumulatively) held it for at least 18 months AND
 It is disposed of to a non-resident (other than a CFC or
connected person making the disposal) AND
 It is disposed for an amount equal to or exceeding
market value.
 Note: if para 64B applies to a disposal of foreign shares,
there is no section 9H exit charge for foreign company
that ceases to be a CFC as a direct or indirect result of the
disposal 116
Foreign share disposals (para 64B)

 Link to paragraph 8(b): Net capital gain includes
amount of capital gain disregarded by para 64B(1) or
(2) as per s64B(3) applies – disposal of equity share in
a foreign company on or before 31 December 2012
 Link to section 9H(3)(e): Company ceases to be a
resident, the capital gain disregarded in terms of
paragraph 64B within the preceding 3 years (from date
company ceased to be a resident) deemed a net
capital gain during year of assessment
 Link to section 9H(3)(f): Company ceases to be a
resident, foreign dividends exempt in terms of
s10B(2)(a) within the preceding 3 years (from date
company ceased to be a resident) deemed a foreign
dividend received during year of assessment (and not
exempt per s10B(2)(a)) 117
39
Taxation IV CGT
Foreign share disposals

(para 64B) - Example
 ABC (Pty) Ltd (a South African company) holds 500
shares in XYZ a company incorporated in the United
States of America.
 The total shares of XYZ are 1 500. Each share provides
1 voting right.
 These shares were purchased during July 2013 for
R280 per share.
 On 18 July 2017, ABC decided to sell the shares and
managed to find a buyer for R450 per share when the
market value was R450 per share.
 The buyer is ordinarily resident in the United States of
America and not a connected person to ABC.
118
Foreign share disposals

(para 64B) – Example Solution
 ABC held at least 10% of equity shares and voting
rights of XYZ (held 33.3%) AND
 ABC held it for at least 18 months (48 months > 18
months) AND
 It is disposed of to a non-resident (USA resident) AND
 It is disposed for an amount equal to or exceeding
market value (Sold for R450, equal to market value).
 Proceeds = 500*450 = R225 000
 Base Cost = 500*280 = R140 000
 Capital Gain = R85 000
 Disregarded as the requirements of para 64B are
met 119
Capital Gains Tax
Special provisions
Entry into and Exit from SA
Deemed disposal
120
40
Taxation IV CGT
Immigrants (para 24)
 Applies to persons who immigrated after 1 Oct 2001

(para 24(4)) and subsequently disposed of assets as
SA residents
 Does not apply to SA source assets and s9D assets
 Two loss limitation rules apply:
 1: Para 24(2): Proceeds AND Base cost (prior to
immigration) are < MV on date of becoming a
resident
 Base cost at immigration = higher of
 Base cost prior to immigration OR
 Proceeds less base cost (expenditure
allowable) incurred on or after immigration
121
Immigrants (para 24)
 Two loss limitation rules apply:

 2: Para 24(3): Proceeds AND Market value on date
of immigration < Base cost prior to immigration
 Base cost prior to immigration = higher of
 MV on immigration OR
 Proceeds less base cost (expenditure
allowable) incurred after immigration
 Note: if no valuation was done at immigration, cannot
claim MV and if no records of expenditure then Base
Cost is nil at immigration
122
Immigration example 1
 A German became a SA resident on 1 February 2014.

The German has property in Germany that he
acquired before he became a SA resident.
 BC expenditure till 31 January 2014: R950 000
 MV on 1 February 2014: R2 500 000
 BC expenditure after 1 February 2014: R350 000
 Proceeds on disposal on 1 April 2017: R2 000 000
Calculate the Base Cost on disposal of the German
property.
41
Taxation IV CGT
 If proceeds R2 million and expenditure R950 000 <
MV R2 500 000 then BC on disposal equal or higher
of
 Expenditure (BC prior to immigration) – R950 000; or
 Proceeds less expenditure after immigration
(R2 000 000 – R350 000 = R1 650 000)
Proceeds R2 000 000

Less: Base Cost R2 000 000
BC on immigration R1 650 000
Plus: Post immigration cost R350 000
Capital gain/loss Rnil
 A German became a resident in SA on 1 February
2014. The German has property in Germany that he
acquired before he became a SA resident.
 BC expenditure till 31 January 2014: R2 000 000
 MV on 1 February 2014: R1 800 000
 BC expenditure after 1 February 2014: R150 000
 Proceeds on disposal on 1 April 2017: R1 700 000
Calculate the Base Cost on disposal of the German
property.
125
 If proceeds R1 700 000 and MV R1 800 000 (on date
became a resident) < R2 000 000 expenditure - prior
to immigration: then BC = > of
 MV (on date became a resident) – R1 800 000; or
 Proceeds less expenditure after immigration
(R1 700 000 – R150 000 = R1 550 000)
Proceeds R1 700 000
Less: Base Cost R1 950 000
BC on immigration R1 800 000
Plus: Post immigration cost R150 000
Capital loss (R250 000)
126
42
Taxation IV CGT
S 9H exit charge - Emigration

 Applies when a person ceases to be a resident:
 Natural person ceases when permanently leaves SA
 Non-natural / juristic person ceases when place of effective
management is moved to another country
 Person other than a company (s9H(2)) AND company
(s9H(3)(a)): Deemed disposal of all assets, except:
 Those that remain in SA tax net i.e. immovable property or
assets of SA PE (para 2); AND
 Certain s8B and s8C assets (s9H(4))
 Deemed proceeds = market value s9H(2)(a)(i)/s9H(3)(a)(i)
 Deemed date of disposal = day immediately before ceasing to
be a resident (DTA does not apply)
(s9H(2)(a)(i))/s9H(3)(a)(i))
 Deemed reacquisition at market value s9H(2)(a)(ii)
/s9H(3)(a)(ii)
127
S 9H exit charge
 Deemed end of Year of Assessment = on date
immediately before day when person ceases to
be a resident (s9H(2)(b)/s9H(3)(c)(i))
 Next Year of Assessment = commences on day
ceases to be resident (s9H(2)(c)/s9H(3)(c)(ii))
 s9H(3)(c)(iii): Companies are deemed to have
declared and paid a dividend in specie at an
amount equal to:
 Market value of all shares in the company
 Less: sum of CTC of all classes of shares
 S9H(3)(b) and s9H(3)(d) deal with CFCs
 s9H(3)(e) and s9H(3)(f) - Make link to para 64B
– see previous slides 128
S 9H exit charge
 CFC that ceases to be a CFC:
 No exit charge:
 If capital gain / loss on disposal of share(s) is
disregarded ito para 64B of Eighth Schedule
(s9H(5)) OR
 If it is as a result of a s47 liquidation distribution
(s9H(6)) (Module on Corporate Rules)
 CFC that becomes a SA resident (para 12(4))
 Also exclude from exit charge assets that would have
been included in s9D net income if disposed of and
interest in immovable property
 Note: asset denominated in foreign currency – market
value proceeds must be determined in currency of
expenditure (i.e. base cost) (s9H(7)) 129
43
Taxation IV CGT
S 9H exit charge
 Note: We do not consider the requirements
of Paragraph 2(2) (interest in immovable
property) if section 9H applies
 This means that it is not relevant whether
the interest in the immovable property meets
the 80/20 rule, there WILL BE a deemed
disposal at Market Value
 Previously section 9H(4)(b) excluded from
the deemed disposal interest in immovable
property that met the requirements of
paragraph 2(2)
 BUT s9H(4)(b) has been deleted 130
Emigration example
At the date of his emigration, 2 April 2017, John

owns:
Asset description: MV on 1 April
2017
Factory building in Isando – rent out to clients – originally R4 000 000
acquired in 2009 for R3 500 000.
Kruger Rands – investment – acquired for R250 000 R965 000
(2004).
Fixed deposit – at a SA bank. R350 000
A Yacht (15m) – original cost – R175 000 (2004). R130 000

(used for trade purposes)
Which assets are subject to CGT and when?

131
Emigration example
On day before emigration, 1 April 2017, John is deemed to have
disposed of the following (s 9H(2)(a)):
Factory Building: Immovable property – specifically excluded s9H(4)
Kruger Rands:
Proceeds (MV at 1 April 2017) R965 000
Fixed deposit:
Capital gain R nil
Yacht: (more than 15m, not personal use asset)
Capital loss (para 15 – not apply – trade) (R 45 000)132
44
Taxation IV CGT
Emigration example - continued
Sum of gains (para 3) R715 000

Less: Sum of losses (para 4) (R45 000)
R670 000
Less: Annual exclusion (para 5) (R40 000)
Aggregate gain for the YOA (para 6) R630 000
Less: Assessed loss b/f (para 9) Rnil
Net capital gain for the YOA (para 8) R630 000
Multiplied by inclusion rate: 40%
Taxable capital gain (para 10) R252 000
133
S 9HA deceased person

 Deceased person deemed disposal on date of death at
MV (s9HA(1))
 Assets not deemed to be disposed:
 Assets awarded to surviving spouse
 Long-term insurance policy disregarded (para 55)
 Interest in a retirement fund (para 54)
 Proceeds will be equal to Base Cost (s9HA(2)(b)(ii))
 Refer to Deceased Estates Module
134
Capital Gains Tax
Special provisions
Foreign currencies
135
45
Taxation IV CGT
Foreign currency translation (para 43)

 Applies to non-monetary assets only (monetary dealt with
under section 24I – refer to International Tax Module)
 “foreign currency” and “local currency” definitions (para
43(7))
 Para 43(1A) does not apply to disposals of: Debt owed and
denominated in foreign currency, Related derivative
instruments such as FECs and FCOCs (para 43(6A))
 Para 43(1) individuals and non-trading trusts where
proceeds and base cost in SAME foreign currency
 Para 43(1A) all other instances
 Para 43(5) applies to deemed disposals where base
cost is in foreign currency
 Para 43(6) applies where MV used as valuation date
value 136
Foreign currency translation

(para 43(1))
 Disposals by individuals and non-trading trusts
 Proceeds: Foreign Currency (FC)
 Base cost: expenditure incurred in same FC
 Application:
 Determine CG/CL in FC
 Translate to ZAR* using
 average exchange rate for the year of assessment
in which disposal happened; OR
 spot rate on date of disposal
This election is on a PER ASSET basis.
*where local currency = ZAR
137
Foreign currency translation - example
 Mr X acquires an asset for $100 000 when average

exchange rate was $1:R7
 Disposed of the asset for $120 000 when average
exchange rate was $1:R9 (assume spot rate was
$1:R9)
 Determine CG/CL in FC: $20 000

 Translate to R using average or spot:
$20 000 x 9 = R180 000
 CGT on ‘real’ gain
138
46
Taxation IV CGT

(para 43(1A))
 All instances other than where para 43(1) applies
 Application:
 Translate Proceeds to ZAR* using
in which disposal happened; OR
 spot rate on date of disposal
 Translate BC to ZAR* using

in which expenditure was incurred; OR
 spot rate on date expenditure was incurred
This election is on a PER ASSET basis.
*where local currency = ZAR 139
 X Ltd acquires an asset for $100 000 when spot rate

was $1:R7
 Disposed of the asset for $120 000 when spot rate was
$1:R9
 BC: $100 000 x 7 = R700 000

 Proceeds: $120 000 x 9 = R1 080 000
 CG = R380 000
 CGT on ‘real’ gain plus forex gain
140
 Person X acquires an asset for $100 000 when average

exchange rate was $1:R7; $1:GBP0.7; GBP1:R10
 Disposed of the asset for GBP75 000 when average
exchange rate was $1:R8.4; $1:GBP0.7; GBP1:R12
 Translate proceeds to ZAR using average exchange

rate for year of disposal: GBP75 000 x 12 = R900 000
 Translate base cost to ZAR using average exchange
rate for year expenditure incurred: $100 000 x 7 =
R700 000
 CG = R200 000
 CGT on real gain and forex gain
141
47
Taxation IV CGT

 Paragraph 43(5):
 Deemed disposals of assets
 Base cost is in foreign currency
 proceeds deemed to be in the SAME foreign
currency
 Foreign Assets – inherited by spouse/heirs – Base Cost
amount for surviving spouse/heir must be in the same
currency in which the asset was acquired by the
predeceased person (link to Deceased Estates Module)
 Paragraph 43(6):
 Valuation date value = MV
 Determine MV in currency of expenditure and
translate MV into ZAR (local currency) using spot rate
on valuation date 142
Capital Gains Tax
Exclusions
143
Primary residence exclusion

(paras 44 – 50)
 Applies to natural person and special trust
 Must hold an ‘interest’ (as defined) in ‘residence’ (as
defined – wide definition) (para 44)
 Natural person or beneficiary or their spouse must:
 Ordinarily reside in the residence as his or her main
residence AND
 Use it mainly for domestic purposes (>50%)
 Note: person may only have one primary residence at

any point in time (para 45(3))
144
48
Taxation IV CGT

 Disregard capital gain or loss if (para 45):
 Proceeds do not exceed R2 million, unless:
 Was not ordinarily resident throughout period OR
 Used residence or part thereof for carrying on trade

for any portion of period (para 45(4))
 Capital gain or loss does not exceed R2 million
 Exclusion applies to land to extent (para 46):

 Size is less than 2 hectares AND
 Was used mainly for domestic / private purposes

(>50%) AND
 Is disposed of at same time and to same person as
residence
145

 Apportion amount to be disregarded if held by more than
one person (para 45(2)) – Apportion the R2m – Link to
para 14
 Apportion for periods when not ordinarily resident (para
47), however
 Deemed ordinary residence (para 48) for a continuous
period not > 2 years if
 Residence offered for sale; or
 Residence under construction; or
 Residence accidentally rendered uninhabitable; or
 Due to death.
 Apportion the Capital Gain – NOT the primary residence

exclusion – see para 47
146

 Apportion for non-residential use after 1/10/01 (para 49),
however
 Deemed domestic use for rental periods (para 50) if
continuous absence not > 5 years AND
 Was used as residence for continuous period of
one year before and after AND
 No other primary residence during that period
AND
 Temporary absence from South Africa or
employed / carrying on business in South Africa
>250 km from residence
 Apportion the Capital Gain – NOT the primary residence
exclusion – see para 49
147
49
Taxation IV CGT
Personal use assets exclusion (para 53)

 Applies to natural person and special trust
 Disregard capital gain or loss for personal use assets
used mainly for purposes other than carrying on a
trade
 If allowance received / receivable for use for business,
still treat as used mainly for purposes other than carrying
on a trade (eg. car allowance received)
 Certain personal use assets excluded from above rule
(para 53(3)):
 Immovable property; gold/platinum coins; financial
instruments; fiduciary, usufructuary and similar interests;
certain aircraft (exceed 450kg) and boats (exceeding 10m)
 Note: capital gains on above are subject to CGT but
capital losses must be disregarded (para 15)
148
Personal use assets exclusion (para 37)

 Loss limitation applies to a company or trust:
 Where an asset listed in para 15 or para 53
‘personal use’ assets is owned by a company or
trust (by way of a interest or shares held directly or
indirectly by a natural person);
 MV of asset decreases while held by co or trust
after the natural person acquired an interest in the
co or trust; and
 Any interest / shares in the co or trust is thereafter
disposed of by the natural person
 Deemed disposal of interest for MV, as if MV had not
decreased
 N/A if > 50% of assets of that company or trust are
used wholly or exclusively for trade
149
Example - personal use

Mr A acquired all the shares in a co of which the sole
asset is a aircraft (empty mass more than 450kg). Mr A
pays R120 000 for the shares (value of aircraft). Mr A
uses the aircraft mainly for private purposes. Due to
recessionary economic conditions he sells his shares in
the company to Mr X for R70 000 (the decreased value
of the aircraft).
Para 37 applies:
Proceeds R120 000
Base Cost R120 000
Gain/(Loss) Rnil
If Mr A had the aircraft in his personal name para 15
would have disregarded the loss.
150
50
Taxation IV CGT
Small business assets exclusion

(para 57)
 Small business – MV of all assets does not exceed
R10 million at date of disposal of assets/interests
 Note: if person has multiple small business or small
business interests then total MV of ALL business
assets must not exceed R10 million
 Disregard R1.8 million of capital gain of natural
person (para 57(3)) on disposal of:
 ‘active business assets’ (assets wholly and
exclusively for business purposes, but excluding
financial instruments and assets held to mainly
derive annuity, rental income, foreign exchange
gain, royalty or similar income) (para 57(1))
 R1.8 million is cumulative over lifetime of natural
person 151
Small business assets exclusion

(para 57)
 Natural person must have:
 Held for continuous period of at least 5 yrs prior to
disposal AND
 Been substantially involved in operations AND
 Have attained age of 55 or disposed due to ill-

health, other infirmity, old age or death (para
57(2)) AND
 All gains must be realised within 24 months of first
disposal (para 57(4)).
152
Other exclusions
 Lump sum retirement benefits (para 54) – local and
foreign
 Long term assurance policies (para 55) – only local
 Second-hand policies may still be subject to CGT
 Exercise of options (call or put) to acquire or dispose of
asset (para 58)
 Compensation for personal injury, illness or defamation
(para 59) – only for natural persons and beneficiaries of
special trusts
 Gambling, games and competition (para 60) – only for
natural person and must be authorised by and conducted
under SA laws
 Foreign winnings and illegal winnings still subject to
CGT 153
51
Taxation IV CGT
Other exclusions
 Disposal by a portfolio of a collective investment scheme in
securities (not property) (para 61) – it is disposal of
participatory interest by holder that is subject to CGT
 Donations to exempt persons (Government, PBO, etc)
(para 62)
 Disposals by exempt persons (exempt per s10) (para 63)
 Awards under the Restitution of Land Rights Act (para 64A)
– applies to all compensation received (land, rights, etc.)
 Exempt the receipt of land contemplated in Chapter 6 of the NDP
from CGT
 Paragraph 64C: Disposal of restricted equity instruments –
disregard CG/CL on s8C(4)(a)/5(a) or (c) - To ensure that
the profit or loss on disposal is dealt with under s8C once it
is unrestricted
 Paragraph 64D: Exempt the donation of land contemplated
in Chapter 6 of the NDP from CGT
154
Capital Gains Tax
Roll overs
155
Involuntary disposal (para 65)

 Person may elect (para 65(1)) if ALL requirements are met:
 Disposal of assets by way of operation of law, theft or
destruction
 Proceeds accrue by way of compensation for disposal
 Proceeds equal to or exceed base cost
 An amount at least equal to receipts from disposal

has/will be used to acquire one/more replacement asset
(must be in terms of s9(2)(j) or s9(2)(k))
 Contract will be concluded contract within 12 months
from disposal (can be extended by max 6 months)
 Replacement asset will be brought into use within 3 years
of disposal (can be extended by max 6 months)
 Asset is not deemed to have been disposed of and to
have been reacquired by person
156
52
Taxation IV CGT

 Capital gain is deferred (para 65(2)) and recognised:
 Non-depreciable asset: Tax gain in YOA when
replacement asset/s disposed
 Depreciable asset: Tax gain in each YOA based on
allowances on new asset/assets (para 65(4))
(capital gain x current YOA allow/total allow. available)
 Multiple replacement assets – apportion CG based on
compensation used to acquire these assets (para 65(3))
 If replacement asset/s are subsequently disposed of,
remaining capital gain not taxed treated as capital gain
arising on replacement asset (para 65(5))
157

 Para (65(6)) – anti-avoidance if taxpayer fails to meet
time limits:
 Include gain at end of prescribed period, calculate
interest on gain (date of disposal till end of
prescribed period) and treat interest as a gain
 Para (65(7)) – roll-over relief not available if
replacement asset/assets are personal use assets (per
para 53)
158
Example - Involuntary disposals

H’s holiday house, with a base cost of R1 550 000,
burns down completely on 15/3/2017. The house
is insured for its replacement cost of
R1 600 000 and the insurance company settles her
claim for this sum on 18/10/2017.
On 21/11/2017 H contracts with a building
contractor to rebuild her house and the project is
completed on 7/2/2018.
What are the CGT implications to H as a result of

the above events?
Tip: Paragraph 53 applicable or not? 159
53
Taxation IV CGT
Reinvestment in replacement assets

(para 66)
 Person can elect if ALL requirements are met:
 Disposal of assets that qualify for s 11(e), 11D(2), 12B,
12C, 12DA, 12E, 14, 14bis or 37B
 Proceeds equal to or exceed base cost
 Amount at least equal to receipts/accruals to be used for

a replacement asset/s that will also qualify for any of the
above mentioned allowances
 Replacement assets constitute s9(2)(j)/(k) assets (i.e.
subject to tax in SA) (s9(2)(j) is NEW – effect on land?)
 Contract will be concluded within one year of disposal
and replacement asset in use within three years (can be
extended by max 6 months)
 Asset is not deemed to have been disposed of and to
have been reacquired 160
Reinvestment in replacement assets -

Example
D Ltd acquired a new and unused machine (A)
for R100 000 from a local supplier (not a
connected person) on 1/10/2016. Machine (A)
was brought into use immediately and qualified
for a s 12C allowance. On 1/11/2017 Machine
(A) was sold for R150 000 and a replacement
machine (Machine (B)) was purchased at a cost
of R450 000. Machine (B) was brought into use
on 15/11/2017 and also qualifies for a section
12C allowance. The company’s year-end is the
last day of December each year.
All parties are VAT vendors and amounts

exclude VAT. 161
Replacement Assets - Example

Machine A
Current year allowance (R20 000)
Selling price R150k limited to original cost R100k R100 000
Cost R100k less allowances R60k (40:20) R40 000
Recoupment R60 000
Deferment (R60k x R180k/R450k) R24 000
Machine B
Current year allowance @ 40% (R180 000)
CGT – Machine A
Proceeds (R150k – R60k) R90 000
Less: Base Cost (R100k – R60k) (R40 000)
Para 66 – roll-over relief (R50k * R180k/R450k) R20 000
Apply inclusion rate at 80% R16 000
162
54
Taxation IV CGT
Transfer between spouses (para 67)

 Disregard CG/CL as transferor and other spouse treated
as if:
 Acquired on same date
 For same expenditure on same date and in same

currency
 Used in the same manner
 Received an amount equal to that received by spouse

disposing that would have been proceeds if disposed to
person other than spouse
 Includes assets transferred (disposed) to spouse on
death, in respect of divorce order and court order
 Excludes disposals to non-resident spouses unless it is a
SA source asset
163
Capital Gains Tax
Attributions
164
Attribution
(para 68 to 73)
 Where capital gain can be attributed wholly or partly
to a donation, settlement or other disposition
 i.e. must be causal link
 Attribute to donor and tax in donor’s hands in the
situations listed below:
(Note: Total amount (s 7 income and capital gains)
attributed to donor is limited to benefit derived as a
result of donation, settlement or other disposition
(para 73))
 Refer to Trusts Module for application in Trusts
165
55
Taxation IV CGT
Attribution
 Capital gain made by spouse (para 68, mirror s 7(2))
 Purpose is to reduce, postpone or avoid
tax/duty/levy
 Also applies to any transaction, operation or
scheme entered into for that purpose
 Note: if capital gain is made from trade carried
out with spouse (eg. partnership) or is connected
to spouse’s trade or derived from spouse or
spouse’s partnership/company, then no need for
donation etc, look at “reasonable” gain and
remainder attributed to other spouse
166
Attribution
 Capital gain made by minor child – attribute to parent (para
69, mirror of s7(3)&(4))
 Donation… made to own minor child or minor child of
another in return for donation, settlement or other
disposition by parent of that minor child to first donor’s
family (cross donation)
 Conditional donations (fixed or contingent) (para 70, s7(5))
 Donor must be resident throughout YOA
 Revocable donations (para 71, mirror s7(6))

 Donor has right to revoke or confer on another
 Donor must be resident throughout YOA
 Capital gain made by non-resident (para 72, mirror s7(8))

 Excludes donations to public benefit type organisations
and CFC’s
167
Persons
 Trusts – refer to Trusts Module (paragraphs 80 – 82)
 Asset vests in beneficiary
 Capital gain vests in beneficiary
 Note: Capital losses
 Note: Base cost of interest in Trust
 Note: Special trusts
 Note: Para 80(2A) – Beneficiary holds s8C equity

instrument
 Deceased estates – refer Deceased Estates Module
(paras 40 – 41)
 Deceased person (Note annual exclusion of R300k)
 Deceased estate
 Heirs and legatees (Note: spouse) 168
56
Taxation IV CGT
Entities
 Partnerships (para 36)
 Not a separate legal entity – partners taxed in individual
capacity
 Note: change in partners results in a dissolution of old
partnership and creation of new but in practice SARS does
not treat these as disposals and partners’ % shares (also
in base cost) just need to be adjusted.
 Proceeds from disposal of a partner’s interest in a
partnership asset is treated as having accrued to partner
at time of disposal.
 Disposal of assets in partnership – split between partners
according to partnership agreement or if none, in
proportion to % interest / profit-share
169
Updates and Future Changes

 Per the Taxation Laws Amendment Bill of 25
October 2017 (and Explanatory Memo)
 Dividend Stripping rule updates: Sections
22B and paragraph 43A
 The proposed amendments will be deemed to
have come into effect on 19 July 2017 and apply
in respect of any disposal on or after that date.
 New paragraph 64E
 The proposed amendments will be deemed to
have come into effect on 1 March 2017 and
apply in respect of any amount received or
accrued on or after that date. 170
 Dividend stripping occurs when a resident shareholder company that is

a prospective seller of the shares in a target company avoids income
tax (including CGT) arising on the sale of shares in that target
company by ensuring that the target company declares a dividend to
that resident shareholder company prior to the sale of shares in that
target company to a prospective purchaser.
 Such a pre-sale dividend to a resident shareholder company is exempt
from dividends tax. This pre-sale dividend also decreases the value of
the shares in the target company. As a result, the prospective seller
extracts value from the company by effectively selling the shares
through tax exempt dividends. As a consequence of this, the seller can
sell the shares at a lower amount, thereby avoiding a much larger
taxable capital gain.
 Currently, section 22B of the Act and paragraph 43A of the Eighth
Schedule attempt to discourage taxpayers from entering into these
dividend stripping schemes. The anti-dividend stripping rules treat a
pre-sale dividend as an amount of income or proceeds from the
disposal of an asset of a shareholder company if those pre-sale
dividends are indirectly funded by the prospective purchaser through a
loan from or a loan guaranteed by the prospective purchaser or a
connected person in relation to that prospective purchaser. 171
57
Taxation IV CGT
 In order to curb the use of share buy-back schemes as well as

circumvention of dividend stripping rules, it is proposed that the
current anti-dividend stripping rules should be broadened to
take into account amongst other things the following:
 a. variations in the share buy-back schemes that taxpayers are
entering into to avoid normal tax on income or CGT on the
outright sale of shares;
 b. the limited scope of application of dividend stripping rules
that focus only on debt funding advanced or guaranteed by a
prospective purchaser or a connected person in relation to a
prospective purchaser funding of the proceeds; and
 c. the limited scope of application of dividend stripping rules,
i.e. the fact that they apply only where the prospective seller,
immediately prior to the disposal of the shares in the target
company holds more than 50 per cent of the shares in in the
target company.
172
Disposal by a trust in terms of a share

incentive scheme – para 64E
 Where a capital gain is determined in respect of the
disposal of an asset by a trust and a trust beneficiary
has a vested right to an amount derived from that
capital gain, that trust must disregard so much of that
capital gain as is equal to that amount if that amount
must in terms of section 8C be—
 (a) included in the income of that trust beneficiary as
an amount received or accrued in respect of a
restricted equity instrument; or
 (b) taken into account in determining the gain or loss
in the hands of that trust beneficiary in respect of the
vesting of a restricted equity instrument.
173
What to do in an exam?
 Deal with each asset independently
 For theory – revenue vs capital may be
relevant
 Determine “asset”, “disposal”, “proceeds”,
“base cost” – if applicable to the question
(use judgement)
 Consider all special rules (specific provisions
or transactions, exclusions, roll-overs,
attributions, specific persons / entities)
 Show all calculations and thought process
(for theory)
174
58

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Taxation IV CGT

Capital Gains Tax (CGT)

Structure of the Eighth Schedule

Capital Gains Tax

 Not a separate tax

Taxable capital gain

*Only applies for years of assessment beginning on or after 1 March 2016

Effective maximum CGT rates – 2018 Year

Companies 80% 28% flat rate 22.4%

*Only applies for years of assessment beginning on or after 1 March 2016

Capital Gains Tax

Definition of asset (para 1)

 (a) Property of any nature whether:

Definition of asset (para 1)

 Example: trading stock

 Purchases = 50 - s11(a) deduction

 CGT Proceeds = 100 less 100 GI

 CGT Base Cost = 50 less 50 s11(a) deduction

Who is liable? (para 2)

 Interest in immovable property in SA

 Non-resident disposing of asset – YES but SA source?

Capital Gains Tax

Disposal event (para 11(1))

Disposal event (para 11(2))

 Events treated as disposals

What is market value? (para 31)

Time of disposal (para 13)

Capital Gains Tax

Calculation of capital gain / loss

 less Base cost

 equals Capital gain or loss

 Asset disposed of in a previous Year of Assessment:

into account (incurred in current YOA) 27

Proceeds (para 35(1))

Proceeds (paras 35(3)(a))

Value Shifting Arrangement Provisions

Source: SARS Comprehensive CGT Guide – Issue 5 31

Value shifting arrangement

Value Shifting Arrangement - Base

 New Base Cost = Base Cost % x Base Cost

Value shifting arrangement - Example

 Base cost per formula (defn only – no calculations for ITC)

 Step 1: Determine whether a ‘value shifting

 Step 2: Determine Bongo’s Proceeds – para

 Step 3: Determine Bongo’s Base Cost under para

Capital Gains Tax

Base cost (para 20(1))

 Assets acquired before 1 Oct 2001 are pre-CGT assets

 Base cost = valuation date value (1/10/2001) plus

Base cost (para 20(1))

Example – fringe benefit asset

An employee acquires a second-hand

Base cost (para 20(2))

Base cost (para 20(3))

 Applied in terms of section 19 (refer later slides)

Base cost (para 20(3)(a))

 Amounts allowed or deemed to be

Base cost example

Calculate the capital gain/loss on disposal?

Example: Sale of machine