Capital Gains Tax in South Africa
The Minister of Finance, Mr Trevor Manuel, announced in his budget speech on 21 February 2001, that the implementation of capital gains tax will be postponed to 1 October 2001, to give the private sector time to install systems. The draft Taxation Laws Amendment Bill of 2001, dealing with capital gains tax, has recently been made available to the public for comment and a copy of the draft Bill is available at http://www.sars.gov.za/ho/bills acts/bill 2001 draft.pdf.
The Bill proposes the introduction of a capital gains tax system to South Africa and provides that assets acquired prior to 1 October 2001 will be included in the system. Although the intended date of implementation of the legislation was 1 April 2001, it was proposed in the annual Budget Speech that implementation be deferred to 1 October 2001 in order to give the members of the private sector an opportunity to amend their management information systems to comply with the provisions of the Bill.
In terms of the Bill, a capital gain resulting from the disposition of an asset acquired before 1 October 2001 is determined by taking the proceeds received from the disposition and deducting the base cost of the asset. The base cost is calculated with reference to the value of the asset on 1 October 2001, together with certain expenditure incurred thereafter.
The value of the asset at 1 October 2001 may be determined according to one of three methods, namely:
- the actual market value of the asset at 1 October 2001;
- a deemed value of 20% of the proceeds received from the disposition of the asset; or
- by means of time-based apportionment calculated over the period during which the asset was held prior to 1 October 2001.
Taxpayers may elect the method that is to be applied in the calculation of the capital gain, but if the valuation option is chosen a valuation of the asset in question must be submitted to the South African Revenue Service (SARS) within two years. Our understanding is that the postponement of the implementation date extends to this window period and, accordingly, any valuations must be submitted before 1 October 2003.
When it comes to intellectual property assets, it is unclear whether the proposed legislation is intended to cover intellectual property assets that have been developed "in-house", and what expenditure may be applied in the determination of the base cost in respect of intangible assets. In addition, the proposed legislation does not permit a capital loss in respect of certain intangible assets acquired prior to 1 October 2001. The rationale behind this exclusion is unclear, as it would appear that capital losses are permitted in respect of intangible assets acquired after 1 October 2001.
For assets acquired after 1 October 2001, the base cost used in the calculation of a capital gain or a capital loss may only be determined as the sum of the expenditure actually incurred in acquiring the asset, together with expenditure directly related to the acquisition or disposal of the asset or to improvements to the asset.
For assets acquired before 1 October 2001, the decision as to which method of determining the value of intellectual property assets is most appropriate will depend on the circumstances of each case. Where substantial savings may be gained by submitting a valuation of the assets, care should be exercised to ensure that this is submitted before the prescribed deadline, and that your valuators are selected carefully. The nature of an intellectual property asset is different to many forms of tangible assets and these differences must be taken into account in the valuation. Furthermore, the proposed legislation provides that regulations are to be promulgated that are likely to prescribe the manner and procedures that must be followed in respect of valuations, and the persons who are to be recognised as valuators.
SPOOR & FISHER