This is article number five in the series What taxes should my business comply with? In the piece published on 03 April 2018 we listed a range of taxes that you will need to consider when running a business. In this piece we will look at capital gains tax commonly referred to as CGT and how it impacts on the business and shareholders.
As a legal entity with the main aim of generating healthy profits, your business will be party to several transactions in the future which will generate proceeds. Now in terms of the income tax act, not all proceeds are equal. The act broadly classifies proceeds as either income or capital of nature.
Proceeds of income nature are taxed in terms of the rules and provision of the act. Capital proceeds are dealt with by a separate part of the act. The disposal of a capital asset will always result in a proceed of some sort – ideally you would not want to give away assets to third parties and not receive any consideration therefor…
The act has a range of rules which govern the tax calculation you will make to derive a capital gain or a capital loss. Whenever you converse with a tax accountant you will hear them use the following terms:
When your consideration received exceeds the base cost of the asset disposed
When your consideration received is exceeded by the base cost of the asset disposed
This is a value placed on the acquisition of the asset by the 8th schedule of the act. It starts with the cost you incurred to acquire the asset and then the act allows certain values to be added or discarded.
This is rate at which a capital gain is included at when calculating the taxable income of the business
Present inclusion rates are:
For the sake of this piece let us assume that your business owned the space from where the operation is run. The company acquired the space in 2010 and all expense allowed by the act resulted in a base cost of R 5 000 000.
In March 2018 the entity disposed of the building at a price of R 8 300 000. The basic capital gains/loss calculation will look as follow:
Proceeds received for the sale of the property: R 8 300 000
Less Base cost of the property (R 5 000 000)
Capital Gain R 2 300 000
Capital loss brought forward from prior year R 0
Include at inclusion rate of 80.0% R 1 840 000
Therefor only R 1 840 000 will be included in the taxable income of the entity. If the proceeds were treated as income of nature the whole R 2 300 000 would have been included.
Please note that this is intended to be an informative piece. If you require assistance with capital gain/loss inclusion, please contact Five Oaks Consult for a convenient consultation.