Submission by the South African Chamber of Business (SACOB) to the Portfolio Committee on Finance concerning the Draft Taxation Laws Amendment Bill 2001: Proposed Introduction of Capital Gains Tax.
Introduction
On the 2nd of March 2000 a delegation gave evidence before this Honourable Committee on behalf of the South African Chamber of Business with reference to the Budget Speech of the Minister of Finance delivered on 23 February of that year.
As Honourable Members may recall we also dealt with the proposed introduction of a wide-ranging Capital Gains Tax. We made the following recommendations in our submission:
"That Government appoints a dedicated subcommittee of the Katz Commission of Inquiry to fully investigate the advantages and disadvantages of the Capital Gains Tax for South Africa in a domestic and international context.
That the South African Revenue Service be tasked to do a full cost benefit analysis of the administrative and collection implications of the proposals currently on the table.
That, if Government decides to go ahead with Capital Gains Tax, the realisation of gains in approved retirement funds be exempt from this tax and that the current basis of taxing such funds be reassessed urgently."
We would like to revisit these submissions in our evidence and would welcome an opportunity to do so.
EXEMPTION OF RETIREMENT FUNDS Dealing with our third submission first; we were impressed with the strong stance taken by this Honourable Committee in its Report the very next day on 3 March 2000 where you expressed your concern about the ad hoc approach to the taxation of retirement funds and stated that "increased taxation of these instruments is perceived as undermining the development of an improved savings culture in the country" and that "the Committee is of the opinion that a stable approach on this issue is essential, and therefore (we) request the Ministry to initiate the consultative process as a matter of some urgency and to present to us with a coherent view on the future tax status of these instruments."
These clear findings no doubt influenced the decision by the National Treasury to exempt retirement funds from Capital Gains Tax pending a full and comprehensive investigation. SACOB commends this decision. As we have said before, it is important to send the right signals regarding personal savings in this country which, low as it is, is largely accounted for in contractual savings in retirement funds. SACOB would be happy to assist with these important deliberations over the next three years together with other interested and affected parties such as the Institute of Retirement Funds, the Life Offices Association and organised labour.
SHOULD WE HAVE A CAPITAL GAINS TAX? This brings us to the fundamental question of whether it would be in the best interests of South Africa to introduce a comprehensive Capital Gains Tax. We note that our first recommendation in March 2000, for the appointment of a dedicated sub-committee of the Katz Commission to fully investigate this question, was not given effect to. We lament this fact and must point out that because the Katz Commission did not recommend a Capital Gains Tax in its Third Interim Report, this Honourable Committee also did not have the benefit of public hearings and debate on this important issue – unlike with most other aspects in the nine Interim Reports of the Katz Commission.
This means that the latest authoritative view on a Capital Gains Tax for South Africa is contained in Chapter 12 of the Report of the Margo Commission of Inquiry (1987) where the majority recommendation was against such a tax. No one could seriously suggest that the unsubstantiated statements in the Guidepublished by SARS in March 2000 should be seen as a substitute for the findings of a Commission of Inquiry. (The Memorandum to the Draft Bill before us is also silent on the matter.)
SACOB regards the proposed introduction of a Capital Gains Tax as a matter of great national importance (we agree with the Honourable Minister of Finance when he called this one of "the most extensive …tax reforms ever undertaken in this country") The matter accordingly served as a main discussion point at the annual Convention of SACOB in October 2000 where some five hundred delegates voted unanimously for a motion warning against serious unforeseen consequences and urging government to reconsider or at least to defer implementation until suitable investigation / consultation has been undertaken.
We have to date not seen the detail of any investigation that might have been undertaken by the National Treasury or SARS, nor have we had any feedback on the more than 300 submissions (including our own) received by them or on their discussions with associations and industry groupings. We are therefore not in a position to determine whether behind the scenes investigation and consultation will stand up to public scrutiny.
It is against this background that SACOB must now resort to these public hearings to put the following substantive issues on the record: 1.International "Best Practice
At a macro level, the proposed introduction of a Capital Gains Tax has been motivated on the basis of this bringing South Africa in line with "international best practice". The Guide states on p5 that "it should be borne in mind that Capital Gains Tax is widely accepted (sic!) Internationally".
This argument is fundamentally flawed. A simplistic "roll call" of countries, where some form of Capital Gains Tax may apply at a given rate, is meaningless unless the tax bases are also explored. The most that can be said is that it is fairly common for countries to have some form of tax on some capital gains – sometimes highly restricted to only certain kinds of assets and at rates varying from 5% to more than 50% and also subject to totally arbitrary basic exemptions and distinctions between short and longer-term gains, as well as whether gains are realised by corporates or individuals. Within countries the rules are also constantly changing – more so than for other forms of taxation. All these variables make it extremely difficult to determine common features, let alone any kind of "best practice". Furthermore, an analysis of O.E.C.D. countries in this context looks vastly different from developing countries and, amongst Commonwealth countries, Capital Gains Tax is certainly not the norm.
It is not surprising that a leading authority in this field, Prof. Cedric Sandford concludes in a paper for the Institute of Economic Affairs that "(a)s a consequence of these varied treatments, no simple classification of countries, such as those with and those without Capital Gains Taxes is meaningful."
What can safely be said, however, is that there is a trend away from Capital Gains Taxes. Based on observations at international tax conferences, and on discussions with revenue officials and tax experts from countries where Capital Gains Taxes are firmly entrenched, the following observation can confidently be made:
Capital Gains Tax has become a discredited tax, both as a revenue collection mechanism and as an economic instrument. Many countries would not introduce a Capital Gains Tax if they had the luxury of tax redesign. Unfortunately, "removing" the tax, once entrenched in the system, is extremely difficult. This is, in itself, a compelling reason for South Africa to re-evaluate all the potential consequences before embarking on this course.
2. Yield Efficiency
Capital Gains Taxes, of whatever kind, (and certainly of the wide-ranging kind now proposed) are notoriously inefficient generators of net revenue. It seems that, at a political level, this fact has been taken on board – see, e.g. public statements made by the Ministry of Finance to the effect that a high yield is not expected. The problem is that a negative yield is a distinct possibility if opportunity costs are factored in. Even basic expenses to SARS, such as the costs associated with the required employment of 400 additional staff by 1 October 2001, will - given the level of skills required in this context - make a significant "dent" in the yield.
Opportunity costs are, of course, difficult to estimate up front, but the absence of a reasonably credible cost benefit analysis is a serious weakness in the current proposals that must be addressed as a matter of urgency. Good governance demands that a robust cost benefit analysis be conducted before the introduction of a tax that has a notorious reputation for its low yield and high opportunity costs arising from distortions it creates in the economy.
It may also be argued that the substantial costs associated with the valuation and re-evaluation of assets as well as the fees to professional advisers should be added to the opportunity cost thus taking the overall yield into negative territory.
3. Administrative Complexity The complexity of administering Capital Gains Tax can be extremely high. Some of the complexity would, however, be avoided by the current proposals being "blind" to inflationary gains and also to the length of time for which assets were held. (These features are, of course, in themselves highly problematic).
Even a relatively "simplified" system, such as the one proposed, would still face all the administrative complexity inherent in record keeping and valuation. The new proposal in the Draft Bill whereby a deceased person will be treated as having disposed of all his / her assets at market value on the date of death, will have serious consequences for estate administration. Again the impact on the ordinary middle class, small business owners and farmers would be disproportionate and even penal. The stated intention to adjust estate duty accordingly will be cold comfort for the vast majority of people who would not have been liable for estate duty in the first place (due to exempt transfers to spouses and the R1 million rebate). In practice millions of ordinary people with R10 001 gain in their investment portfolios will now be drawn into the "estate tax" net. Has any consideration been given to the administrative burden that this would cause and the consequential delay in the winding up of deceased estates? Even the highly refined United States tax system does not levy Capital Gains Tax on assets held at death – no doubt mindful of the very negative estate liquidity consequences that would otherwise follow and the impact on efficient estate administration.
For SARS, the introduction of a highly complex tax would not only mean the drafting of complex legislation, system changes and training of staff, but also dealing with avoidance and evasion on what may be a massive scale, given the "window of opportunity" before the date of implementation. The overall situation will be vastly aggravated by the recent move away from a source based to a residence-based system of taxation – a truly fundamental change.
From first hand experience in dealing with SARS over many years, it is clear that there has been an improvement in administrative capacity over the past couple of years – in line with the strong recommendations of the Katz Commission in their First Interim Report. There are also clear signs of a potential breakthrough as far as administrative capacity is concerned. SACOB considers that it would, indeed, be a very heavy price to pay to undermine this momentum now by the hasty introduction of a low yielding administratively complex new tax. It is submitted that purely from a timing point of view, the implementation of Capital Gains Tax must be carefully reconsidered.
4. Equity Considerations
The taxation of capital gains is often motivated on the grounds of vertical and horizontal equity. At the most basic level, this means that it is inequitable for a taxpayer with a low ability to pay to be taxed more heavily than a taxpayer with a high ability to pay. It is well understood by SACOB that this principle has special significance in the current South African socio-economic context.
There is no doubt that capital gains are inherently accretions to wealth and hence enhance the ability to pay. This could lead one to the "easy" conclusion that Capital Gains Tax will bear more heavily on the wealthy. Unfortunately, this is not so in practice because the trigger for the tax is not wealth per se, but the realisation of wealth in the form of capital gains. The equity principle is, in fact, seriously undermined by the simple truth that the very wealthy can afford to have their wealth work for them without having to realise gains, whereas the less wealthy are much more likely to have to realise assets to access their capital and thus fall into the Capital Gains Tax net.
The aggregation of capital gains and capital losses and the carry forward of assessed losses, which is a necessity for a reasonably fair system, also tends to favour those with large and diversified portfolios. The ordinary middle class person with an undiversified investment in some shares or unit trusts may pay substantial tax if his / her investment succeeds, but get no tax benefit if it fails. On the other hand wealthy investors with highly diversified portfolios can time the realisation of gains and losses so as to pay little or no capital gains tax. Any attempt to prevent such tax planning is bound to be futile.
Furthermore, equity is essentially in the eye of the beholder and, where capital gains are derived from savings, which have been made out of taxed income, the taxpayer may well perceive it to be an improper subject for further taxation. It could also be perceived that Capital Gains Tax treats those who are already wealthy less harshly and really strikes at those seeking to become wealthy. In the South African context, this perception would be particularly significant, given the fact that many (most?) taxpayers in the latter category have been previously hampered in their efforts to accumulate capital. This must have a direct bearing on tax morality as taxpayers’ propensity to seek to avoid, or even evade, tax is directly proportionate to their perceptions of equity.
5. Locking-in Effect Capital Gains Tax cannot be levied on accruals (this is also one of the fundamental differences between this kind of tax and income tax). The result of this truism is that realisation becomes a critical tax event. Because realisation is more often than not dependent on the voluntary action of the owner of the asset, it leads to a massive locking-in effect, as it is human nature not to realise assets, which carry an inherent tax liability.
Economically speaking, this is not only negative as far as the free flow of capital is concerned, but also as far as the interests of the fiscus are concerned. Taxpayers and the economy lose out from the locking-in effect, but the fiscus does not gain anything. This can hardly be a desirable outcome in the South African context.
The locking-in effect is also particularly distortional in the case of equity shares and property markets. Sound commercial decisions such as the need for active, as opposed to passive, portfolio management are distorted by tax considerations, ultimately leading to a significant obstruction to the efficient working of these markets. Again, this is highly undesirable in the South African context.
Ironically, given the equity argument, lock-in is a particularly serious problem for taxpayers who own one or a few capital gains assets – e.g. a family business and who cannot diversify the returns on those assets. For investors who are well diversified, lock-in is a less severe problem.
6. Effects on Entrepreneurship It is trite that South Africa needs to encourage entrepreneurship because new and growing small businesses are the best generators of employment. Studies in the UK have shown that managers will assume the greater risks, longer hours, and lower income for the sake of a new venture only if the carrot of the capital gain from equity in the new business is sufficiently attractive. This is rational human behaviour and it follows logically that a Capital Gains Tax – especially the introduction of one where there has not been one before – can only have a negative effect on entrepreneurship and therefore on job creation.
It s for this very reason that in many countries (France, Germany, Holland and Italy being examples) an entrepreneur often pays no Capital Gains Tax on the sale of shares in the company that he/she runs or helps to manage. This is an area where the supply side argument (lower taxes leading to higher overall revenue yield) has been consistently demonstrated in international studies. It is also an area where the pull factor of a competitive advantage in taxation has been vividly illustrated in terms of new business location. Whilst tax is perhaps not the most important factor that a foreign investor would consider, SACOB knows from our regular contact with foreign trade delegations visiting South Africa that the absence of a Capital Gains Tax is seen as a distinct competitive advantage for entrepreneurs to set up business in this country.
Finally, there are the mixed messages that the proposed Capital Gains Tax would be sending to existing small and medium enterprises. On the one hand, Secondary Tax on Companies at 12.5% is aimed at encouraging the recapitalisation of businesses through the ploughing back of profits, but, on the other hand, when the capital gain is realised, it will now be taxed at 15%. This is not the way to encourage entrepreneurship.
SACOB believes that it is critical to carefully reconsider the serious consequences which the proposed Draft Bill will hold for the small business entrepreneur and the farmer who are the very people we should be encouraging if we are serious about job creation, economic growth and ultimately foreign direct investment. At the very least an exemption from Capital Gains Tax on small business growth and on the value of productive agricultural land should be introduced. This is an area where we should look at "international best practice" (In Canada e.g. a lifetime exemption of Can$ 500,000 (more than R2.5 million) applies to gains from the sale of farm property or shares in qualified small businesses.)
In the light of the above [1 to 6] it is the considered view of the South African Chamber of Business that our original recommendation for a dedicated sub-committee of the Katz Commission of Inquiry to fully investigate the advantages and disadvantages of the Capital Gains Tax for South Africa, in a domestic and international context, still stands. At this juncture we would submit that the terms of reference of the sub-committee should extend to an investigation into the whole issue of so-called international "best practise" regarding Capital Gains Tax and we respectfully submit that the investigation should include direct consultation with fiscal policy experts and revenue authorities in relevant (e.g. trading partner) countries to establish whether Capital Gains Tax is indeed a "widely accepted" tax or rather a discredited tax today.
COST BENEFIT ANALYSIS Finally this brings us to the second recommendation made by SACOB in March 2000 (see p1 above) viz. for a full cost benefit analysis to be done by SARS. We note with concern that since the recommendation, some nine months ago, no cost benefit analysis was done, or if there was such an analysis done it was not published – for unknown reasons. We respectfully submit that this was and still is a perfectly reasonable request from the business community.
At this stage we would respectfully call on the National Treasury, for the sake of good governance, to undertake and to publicly report on the results of a full cost benefit analysis of the proposals contained in the Draft Bill before us. Without being prescriptive we would submit that such analysis should focus on yield efficiency in the light of administration (including employment) and collection costs as well as opportunity costs where these can be foreseen and quantified.
SACOB believes that giving effect to this fundamentally sound recommendation would further enhance the principle of transparency which is now well entrenched in the National Treasury’s commitment to the Medium Term Budget Policy Statement.
IN CONCLUSION It is the considered view of the South African Chamber of Business (unanimously endorsed by its Annual Convention) that there is a serious inconsistency between the Government’s policy objectives of increased savings and direct investment in the economy and the proposed introduction of a Capital Gains Tax with effect from 1 April 2001.
We accordingly urge this Honourable Committee to recommend to the National Assembly of Parliament that the Draft Taxation Laws Amendment Bill, 2001 (To Incorporate the Taxation of Capital Gains) be postponed sine die and at least until the publication and due consideration of a White Paper dealing with the results of input received by SARS and based on much deeper investigation and research along the lines of our recommendations above.
Cape Town 8 January 2001.
11 January 2001
SACOB COMMENT ON THE CAPITAL GAINS BILL, 2000 SACOB reiterates that it is unequivocally opposed to the introduction of this tax. The motivation for our views is encapsulated in the comments submitted to you on 8 January 2001, a copy of which is attached for ease of reference.
SACOB places on record that it has not been possible to consult adequately with its members on the comments of the Bill, due to the following two factors:-
the limited time given for detailed comment; and
the fact that the Bill was published at the commencement of the festive season, when many business persons are out of the office and difficult to contact.
Notwithstanding our rejection of CGT, and the difficulties encountered in consulting our membership, we have studied the Bill, and attach our response for your consideration. SACOB advises that it may amend its input in the light of additional comments, which may be received from members during the course of the next several days.
TAXATION LAWS AMENDMENT BILL – Comment.
Introduction.
SACOB represents some 40000 business organisations throughout South Africa who are affiliated to 80 individual Chambers of business / commerce. The timing circumstances under which comment on the proposed legislation is called for (mid December to 10 January) has made it difficult for SACOB to consult effectively with its members. Along with other South Africans, many business people are away over this period. This is unfortunate, as legislation entailing taxation reforms of the extent envisaged will have far-reaching economic and social consequences for both business and society in general. Specifically SACOB submits that the request for comment by 10 January is unreasonable and is indicative that government intends to press ahead with this controversial legislation regardless.
It is on record that SACOB has opposed the introduction of a Capital Gains Tax (CGT). The issue was the subject of a motion adopted at the SACOB annual Convention in October last. Copies of that motion together with a background paper were sent to the Minister of Finance after the Convention. A request for a meeting with the Minister in order to outline the concerns of business over the proposed CGT legislation was turned down. The commentary offered on the proposed legislation must therefore be viewed in the context of SACOB’s unequivocal opposition to the introduction of CGT.
General Comment
While it was not specifically dealt with in the Guide to Capital Gains Tax issued by SARS in 2000, it was certainly understood from pronouncements made by the Minister of Finance, that only capital gains arising in respect of assets disposed on or after 1 April 2001 would be subject to CGT. In the absence of transitional rules similar to those adopted on the introduction to VAT, capital gains arising in respect of assets disposed of before 1 April 2001 will be subject to CGT should the proceeds be received by, or accrue to, the seller after that date. It is recommended that only disposals that take place, or are deemed to take place, on or after 1 April 2001 should fall within the CGT net.
While clause 3 of the Draft Taxation Laws Amendment Bill. 2001, appears to impose tax on a cash receipt basis, clause 25 appears to override that basis with an accrual basis. As the CGT will form part of the income tax system, it is recommended that clause 3 be amended to make it clear that CGT is imposed on an accrual basis.
As regards the interaction of CGT and estate duty/donations tax, it is recommended that any CGT paid be allowed as a deduction against any estate duty/donations tax liability that may arise. This approach it is suggested will to a large extent obviate complex rules to avoid double taxation.
Commentary on the draft provisions Clause 4
The non-deductibility of capital losses cannot be defended on any grounds. Our income tax system is clearly based on the ability to pay principle of taxation. A taxpayer’s ability to pay is clearly affected by any capital loss incurred by him/her. The inequity may be illustrated by way of a simple example. If a person derives a capital gain in year1, but incurs a loss in year 2, a CGT liability arises in year 1, and the loss is carried forward without in effect any tax relief for the taxpayer in that year. By contrast, if the loss was incurred in year 1 and the profit in year 2, the loss would now be available to be offset against the gain, providing tax relief in that year.
We see no reason why a capital loss should not be treated on the same basis as an ordinary loss that is taken into account in the year in which it is incurred.
Clause 5 See the comment above.relating to the granting of a tax credit for any CGT paid in respect of the same assets. Clauses 7 and 8 Given the very short implementation period, it would seem that some dispensation will be necessary in the first year so as to allow the affected taxpayers an opportunity to amend their systems to provide them with the required information. Clause 15
It is absolutely imperative that the regulation be issued timeously.
Clause 19 (Eighth Schedule)
Paragraph 1
The reference to "interest" in the definition of "active business asset" should be a reference to "interest as defined in section 24J". The reference to "excluding South African currency, but including any coin made manly from a precious metal" in the definition of "asset" could be amended to read the same as the definition of "money" in the VAT Act. The exclusion provided for in paragraph 42(a) should be worded similarly to the VAT provision. Paragraph 2 What is the value referred to in subparagraph (2), market vale or book value? Paragraph 3
See comments above regarding clarity in respect of the accrual basis. It is suggested that the inclusion of the words "received by or accrued to a person" be included after "proceeds".
Paragraph 5
The 1995 Katz Commission of Inquiry into Taxation suggested that the first R15000 of any gain should not be subject to CGT. In 2001 value terms that amount could be translated to a figure of + R20000. It is therefore argued that this amount be set at R25000 which would equate it to the amount that is presently allowed as tax-free for donations.
A similar exclusion should apply to all taxpayers so as to avoid unnecessary administration. Paragraph 10
The CGT rates of 50% and 25% respectively for corporations/trusts and natural persons are supposedly intended to accommodate inflation. To the extent that inflation affects corporations and natural persons alike the rationale for introducing a different percentage between the two is obscure. If equity is to be accepted as a taxation maxim, SACOB submits that a uniform 25% be adopted. However, such a flat rate does not truly compensate for those ‘gains’ that accrue purely as a reflection of inflation. SACOB would argue in support of a tapered relief system in which the percentage of gain subject to CGT is reduced according to the length of time an asset is held. Furthermore, consideration must be given to the effect that any capital gain has on a taxpayer having a low taxable income. SACOB would argue that the inclusion of the gain should not raise the taxpayer to another tax bracket. A case exists for proposing that such a taxpayer should be taxed at his average level. Paragraph 11(2)
Provision should be made for the situation where joint owners of property acquire defined portions – see for example the exemption provided for in section 9(1)(g) and (h) of the Transfer Duty Act.
Paragraph 13 Paragraph 13(2) places an immediate CGT obligation in respect assets held (excluding immovable property) on ‘a person who ceases to be a resident’. This could impose a severe (and in SACOB’s view a penalising) burden on would-be emigrants. The question is whether this is a deliberate ploy to discourage such people. If not, there should be some accommodating period of grace in which the taxpayer could be allowed to meet his obligations. Such a period would also allow the individual to resume his residency status without incurring harsh tax treatment.
As regards subparagraph (5) and (6), it is our understanding that the United Kingdom rules relating to post valuation gains are very much simpler than those proposed in this paragraph and should be considered. Paragraph 14 It is not clear to us what role a time of disposal rule plays, as the charge to CGT arises in relation to the receipt or accrual of the proceeds in consequence of a disposal. A "disposal"is in turn defined in paragraph 11. Should paragraph 3 not provide for a charge to CGT in respect of the proceeds derived in relation to a disposal that has deemed to take place in terms of paragraph 14? Paragraph 17 It is not clear to us why subparagraphs (c) and (d) are not worded the same as the exclusions provided for in paragraph 42. It would seem that the exclusions in respect of a capital loss should be the same as the exclusions in respect of a capital gain. Paragraph 18 This approach to dealing with potential evasion of CGT by the manipulation of value is in our view too extreme. There are sufficient provisions in our law to enable SARS to attack any such activity. Unfortunately, the proposed approach will adversely impact genuine cases and its deletion is recommended. Paragraph 22 We assume that any expenditure incurred in respect of acquiring an option in relation to the asset subsequently acquired will be accepted as part of the expenditure incurred in respect of its acquisition.
How are Forex gains and losses to be dealt with?
The reference to any amount of VAT not allowed "as an input deduction in terms of section 16(3)" of the VAT Act is unclear. Is it input tax (which is dealt with in section 16(3)(a)) or merely all deductions contemplated in section 16(3)? It would seem to us that the reference to "input" should be deleted.
Paragraph 22(2)(b) essentially introduces a cash basis in relation to the deduction of expenditure incurred. There does not seem to be any reason for doing so given that the gain is determined on an accrual basis and that the a deduction for income tax purposes is not limited to amounts actually paid. Paragraph 23 It would seem to us that the paragraph deals with a number of separate issues and it may simplify matters if the issues were dealt with in separate paragraphs.
We have a concern that the regulations will not have been issued prior to implementation date. Paragraph 25 Will the proceeds include any VAT, which have to be accounted for by the purchaser? If not, it would avoid doubt and conflict if this were specifically provided for in the legislation.
Paragraph 26 It is not clear why it is necessary to include all connected person transactions within the ambit of this anti-avoidance provision. Many bona fide transactions take place between connected persons at less than market value for varied commercial reasons. This provision would seek to impose a tax burden on the selling party in circumstances that are not appropriate. Should any connected parties seek to avoid CGT by transferring assets at simulated prices, the relevant anti-avoidance provisions should be applied.
In fact, it may be that this provision could be used to avoid CGT in that a seller with a capital loss may dispose of an asset to a connected party for a nominal amount, but in effect pass on a higher base cost for CGT purposes.
SACOB is of the view that instead of treating intra-group transactions in this way, transfers between related companies should in effect be ignored for CGT purposes. Rollover relief is appropriate.
The concept of a "non-arm’s length transaction" is alien to our tax law. Rather the type of transactions should be more clearly identified. The provisions of section 103(1)(b) of the Income Tax Act should be considered Paragraph 34 By and large property values have risen markedly over the past decade. To a large extent they reflect the prevailing high rate of inflation that has taken place, but even more they reflect the fact that property prices in the pre-nineties period were depressed even thought double digit inflation was prevalent in those years. Furthermore consider the tax obligation facing a ‘natural person/special trust’ that wishes to dispose of a primary residence that has been occupied by a family for a generation or two. In SACOB’s view a CGT concession of R1 million in respect of a primary residence is totally insufficient. If there is to be a concessionary limit, let it be not less than R5 million.
Paragraph 35 How is the value of the relevant 2 hectares to be determined relative to the excess hectares?
Paragraph 39 The provision is not clear as regards the determination where only part is occupied for non-residential purposes. It is suggested that an apportionment ratio/formula be provided for.
All periods of use should be taken into account and not merely that after implementation date.
In addition, it is suggested that a de minimus rule be adopted so that if less than 10% of the residence is used for non-residential purposes, no apportionment will be necessary.
Paragraph 40 While SACOB welcomes the concession granted in respect of the transfer of a residence from a company, we would urge the same concession in respect of transfers from trusts.
Paragraph 44 For the reasons partially outlined in respect of paragraph 34, this figure is again inadequate. In addition SACOB would argue that the absence of social security in South Africa requires the individual taxpayer to provide for his old age and related health protection measures. The CGT concession should again be raised to no less than R5 million – the gross asset value that the legislation itself defines as a small business.
In many cases a retiring owner who is a sole or substantial shareholder may wish to retain a minority share in the company. The requirement that the taxpayer must divest himself of his entire shareholding appears to us to be too harsh In addition, it may be that the taxpayer has not held the particular interest being disposed of for a continuous period of 5 years. That is, the taxpayer may have increased or decreased his interest over the stipulated period. Must the taxpayer have held the specific interest being disposed of, say 80%, for the full 5 years, or merely some of the interest now being disposed of? It may be that some apportionment may be necessary. Paragraph 52 It is not clear why interest is imposed in terms of paragraph 52(4)(b) from the date of disposal, as the liability for the relevant CGT relating to the disposal of an asset arises in relation to a year of assessment. Paragraph 53 The relief provided for in the circumstances contemplated in this paragraph should be dealt with on the same basis as that provided for under paragraph 52. Paragraph 54 It is not clear if these provisions will apply on death or divorce. It may be helpful to deal with theses two events in this paragraph as well. Paragraph 55 There does not seem to be any rational reason why the company should not be in possession of any other assets. Surely the limitations as regards capital losses and R5m assets is sufficient to limit any possible misuse of this concession?