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As per our previous blog, this blog looks at some of the basic concepts of Capital Gains Tax (“CGT”).

Personal-use assets

It would be impractical to keep track of every asset you hold, especially if it’s held without profit-making purposes. This is why the law provides that any capital gain or capital loss due to the disposal of a personal-use asset (PUA) can be disregarded.

So, what is a PUA? Simply put, a PUA is any asset used mainly for purposes other than trade. Suppose an artwork collection is acquired by a natural person or special trust and held mainly for purposes of enjoyment rather than to make a profit. In that case, it will be regarded as a PUA. PUA would also include items such as jewellery, household furniture and effects, stamp collections, etc. But PUAs do not include, among other items, immovable property, financial instruments and boats or aircraft larger than prescribed sizes.

So if you incur any capital gain or loss after selling a single painting or the entire collection, it won’t result in any CGT consequences. But the same doesn’t apply to your Cessna airplane.

Disposal of small business assets

Let’s say that John (a resident for South African income tax purposes) is 58 years old, and he wishes to retire this year. For the last 15 years, he has been the sole proprietor of an ice cream shop. John owned the building used to make and sell ice cream, and the ice cream machines have appreciated in value.

Since the market value of the business is under R10 million, it qualifies as a ‘small business’. John conducted this business for more than 5 years, he is over the age of 55, and this is his only business.

Based on the above, John qualifies to have R1.8 million of the capital gains from the immovable property and the machines disregarded.

This is a rewarding provision for small business owners who wish to retire, but it also applies when a person has died or fallen ill.

Capital gains consequences upon death

In the year John passes away, all his assets will be considered as if he’d sold them. These assets then become part of his estate. The calculation of any capital gain/loss will form part of the income tax return for the year of his death. Since it’s possible that the unplanned sale of his assets could result in a hefty capital gain, the exclusion is increased to R300 000.

Tax harvesting

Tax harvesting is not explicitly prohibited in South Africa. Each year a taxpayer is entitled to an annual exclusion of R40,000. Where no assets are sold within a particular year of assessment, the taxpayer effectively “loses out” on this annual exclusion. To utilise the exclusion provided by SARS, many taxpayers sell assets where the gain will be equal to R40,000. In doing this, one needs to be mindful of anti-avoidance provisions, especially those aimed at listed shares.

Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts at AJM Tax share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday.