SOUTH AFRICAN INSTITUTE OF CHARTERED ACCOUNTANTS (SAICA)

CAPITAL GAINS TAX (CGT) – SUBMISSION TO THE PORTFOLIO COMMITTEE ON FINANCE (PCF): TAXATION LAWS AMENDMENT BILL
26 January 2001

The South African Institute of Chartered Accountants (SAICA) welcomes the opportunity to raise certain issues flowing from the Revenue Laws Amendment Bill, 2001. At the outset it must be placed on record that the Chairman attended a meeting at the South African Revenue Service (SARS) on 18 October 2000 to discuss the legislation and was requested to comment on an early version of the Bill on 24 November 2000. This is the first opportunity for the full Taxation Committee to comment on the Bill. Certain of the comments made herein have been communicated to SARS previously.

This submission has been prepared based on the draft Bill published on 12 December 2000 and does not seek to evaluate the merits or otherwise of introducing this tax in South Africa at this time.

1. INTRODUCTION
1.1 The effective date – 1 April 2001
It is accepted that the intention to introduce CGT was announced on 23 February 2000 and that the public were invited to make comments on the draft CGT guide by 31 March 2000. It is reported that SARS received approximately 300 submissions on the planned introduction of CGT in this country, but it is submitted that the effective date is unrealistic when one has regard to the changes required by businesses and natural persons in South Africa in order to fully comply with the records which need to be kept for the purposes of the tax. The accounting and system changes required by especially the life companies, unit trusts and other entities, cannot be underestimated or ignored. The design of new systems can only commence once the legislation has been finalised.

The introduction of the tax should, in our view, be postponed until 1 March 2002 to allow for further consultation and time for business to adapt their accounting systems. This proposed date also coincides with the commencement of the tax-year of most natural persons in this country.

SARS was recently engaged in drafting the income tax returns for individuals and companies so that these returns may be issued timeously for the 2001 tax year. A number of natural persons have tax years other than February and therefore the 2001 individual tax return had to specifically refer to the CGT provisions even though CGT had not yet been legislated for. Similarly, the company and trust tax returns had to refer to CGT even though the legislation was not finalised. It is most unfortunate that tax returns were having to be prepared for 2001 even though the legislation on CGT was not yet drafted and more importantly, not yet legislated. It must be questioned whether the systems in use by SARS have been revised for the introduction of the tax, especially for the new provisional tax rules.

1.2 Release of the Bill
It is most unfortunate, in our opinion, that the draft CGT bill was only released on 13 December 2000, that is a few days before most citizens departed on their annual vacation. To request comments to the SARS by 10 January 2001 and to the Portfolio Committee of Finance by 8 January 2001, was, in our opinion, unreasonable.

SARS has admittedly consulted a number of organisations on the proposals made in the Bill, but it is unfortunate that the process utilised in the introduction of VAT in South Africa was not adopted in introducing this new tax. We were asked to comment upon five versions of the residence basis of legislation, whereas in this case we have only had sight of the incomplete CGT Bill released on 12 December 2000.

1.3 Education of taxpayers and SARS Staff
SARS has a duty to both its own staff and taxpayers alike to educate them as to the implementation of this tax. Compliance with the law can only be ensured where SARS’ own staff has the necessary skills and taxpayers have the necessary knowledge as to their responsibilities and obligations under the new provisions. SARS is therefore urged to embark urgently upon a planned programme of training both its own staff and taxpayers alike.

We can learn from the experience of other countries and when one has regard to the material published by the Australian Tax Office, Inland Revenue of the United Kingdom and the Canada Customs and Revenue Agency, SARS is urged to follow suit.

1.4 Explanatory Memorandum
Unfortunately, the Explanatory Memorandum issued on the Bill is very brief and does not cover the detail that is dealt with in the Bill. SARS is therefore requested to issue a far more meaningful Explanatory Memorandum so as to indicate its views on the provisions contained in the Bill. Ideally, SARS should, in time, also issue a guide on CGT along the lines of that issued by the Australian Tax Office. That guide is well written and most comprehensive in that it is contains numerous examples of assistance to taxpayers.

1.5 Language and style of the Bill
SARS must be complimented on the style and language used in the Bill in that it is relatively easy to understand and does not comprise the technical legalese that is often seen in draft legislation.

The style used in the Bill must, therefore, be supported in that it is relatively easy to understand and comprehend the intention behind the particular provisions.

CONSEQUENTIAL AMENDMENTS (Income Tax Act, 1962, as amended)
2. Section 1 - definitions
2.1 It is suggested that full definitions be included in the principal Act and that duplications are removed. Where terms are defined in the principal Act, they should cross-refer to the Eighth Schedule.

2.2 It is believed that a definition of "special trust" should be introduced into the principal Act and not merely contained in the First and Eighth Schedules to the Act.

2.3 It is proposed that the definition of "connected person" be amended in relation to a trust. The concern that must be raised in regard to the amendment is the purpose thereof i.e. what mischief is the Commissioner seeking to address by introducing the amendment as proposed.

2.4 It is important that the effective date of the amendment deals with this concern in that the amendment should only apply to disposals of assets to the trust on or after a specified date.

2.5 At paragraph 1(7), the extension of the definition of ‘connected persons’ in relation to trusts – especially the term ‘may be appointed as a beneficiary’ in the second line of subsection (b)(iii) is too wide and will encompass persons who clearly should not be the target of these rules.

2.6 At paragraph 1(7)(b), what is the intention of this amendment? The wording "may on or" is too wide and open-ended and may have a retrospective effect. It is suggested that a time period is used, say, 3 years.

3. Section 5(10) – averaging
3.1 As far as we can recall, it was agreed at the meeting held on 18 October 2000 to discuss the CGT legislation, that the inclusion of the capital gain in taxable income was not intended to result in the inflation of a person’s average rate of tax. This becomes important particularly where a taxpayer retires from a pension, provident or retirement annuity fund and is in receipt of a lump sum subject to tax in terms of section 5(10) of the Act. Our understanding of the position was that the average rate will be determined prior to the inclusion of the capital gain in the taxpayer’s taxable income. The concern in this regard is best illustrated by way of an example, which is set out below.

Example:
Assume a taxpayer, over the age of 65, retires from a pension fund and receives a lump sum of R200 000. The first R120 000 is exempt from tax under the Act. Assume initially that capital gains are excluded from taxable income in determining the average rate of tax.

Taxable income for 2000 tax year - R100 000
Taxable income for 2001 tax year - R110 000

Average Rate of tax: 2000 - 32,07%
Average rate of tax: 2001 - 30,36%
Tax due on lump sum - R80 000 x 32,07% = R25 656

Now assume a capital gain realised in the 2001 tax year of say R120 000 on the sale of listed shares is required to be included in taxable income for rating purposes.

Taxable income for 2000 tax year - R100 000
Taxable income for 2001 tax year - (R140 000 [i.e. R110 000 + R30 000 (i.e. 25% of capital gain is included)]

Average rate of tax: 2000 - 32,07%
Average rate of tax: 2001 - 32,43%

Tax due on lump sum - R80 000 x 32,43% = R25 944

Increase in tax on lump sum as a result of inclusion of taxable capital gain is R288 if one has regard to the tax rates in 2000 and 2001. If one has regard to the average rate of tax in 2001 only, the increase in tax is R1 656 (i.e. [R80 000 x 30,36%] - [R80 000 x 32,43%]).

It must be noted that the basic exclusion of R10 000 is ignored in this example and from all other examples contained in this submission.

The increase on tax on a lump sum as a result of the inclusion of the taxable capital gain in 2001 is not that substantial in that it amounts to R288 on the figures supplied. The point is though that the inclusion of the taxable capital gain results in an increase in the taxpayer’s average tax rate which will increase tax payable on the lump sum received from a retirement fund. In view of the Commissioner’s decision to exclude pension funds from CGT and to revisit the taxation of the retirement fund industry, it is submitted that the introduction of CGT should not increase the tax payable by taxpayers on lump sums received from pension funds until the taxation of the retirement fund industry is resolved.

The above example also illustrates another important point namely that the taxpayer does not obtain the benefit of decreasing tax rates insofar as the taxation on the lump sum is concerned. If one has regard to the tax payable on a lump sum ignoring the taxable capital gain, the taxpayer is obliged to pay tax at the highest of the average rate in the year in which they retire and the immediately preceding year of assessment. In the first part of the example, the average rate of tax in 2000 is 32,07% whereas in 2001 it drops to 30,36% as a result in the Minister’s policy decision to reduce individual marginal tax rates. If the taxpayer was liable to pay tax at the average rate in the year of retirement only, the tax payable on the lump sum would amount to R24 288 and not R25 656 as is currently the statutory position. The taxpayer is therefore worse off to the extent of R1 368 despite the fact that the marginal rates have been reduced. It is untenable that the taxpayer is not able to obtain the benefit of the decline in tax rates because of the particular wording in section 5(10) of the Act which compels the average rate to be determined by having regard to the rate of tax in the year of retirement and the immediately preceding year. This inequity should, in our opinion, be addressed.

It is therefore submitted that section 5(10) be amended to deal with this anomaly and also be amended to exclude from the calculation of the average rate of tax, the amount of the taxable capital gain derived by the taxpayer in the year of retirement.

3.2 Section 5(10)(b) should be amended so that "A" is amended so that taxable capital gains are excluded from the reference to taxable income contained therein. A similar amendment is, also required to "B" referred to in section 5(10)(c) of the Act.

4. Section 6quat – tax credits
4.1 At paragraph 2(1), ensure that recognition is given to foreign capital gains tax under Section 9D.
4.2 The section currently provides that the credit shall only be granted in respect of amounts included to the extent attributable to an asset situated outside the Republic. It may happen that a resident in South Africa is taxed overseas on domestic assets disposed of and section 6quat needs to take account of this. For example, a South African resident may be in possession of a green card and therefore liable to CGT in the United States on assets disposed of in South Africa. The United States tax should be allowed as a credit against South African tax in terms of section 6quat and it is for this reason that the wording should, in our view, be amended to that suggested below.

4.3 It is thus suggested that the wording contained in section 6quat(1)(e) be amended along the following lines:

"Any taxable gain included in terms of section 26A to the extent it is attributable to any capital gain in respect of any asset."

5. Section 9E: foreign dividends and CGT rules – preference
The foreign dividends rules contained in Section 9E includes a provision that treats the disposal of certain shares as being ‘deemed foreign dividends’ but clarification is required on whether the CGT rules take precedence over the foreign dividends rules in the case of such disposals.

6. Section 22 – valuation of trading stock
6.1 Paragraph 13(2)(c) of the Eighth Schedule deals with assets that are not trading stock of a taxpayer when such assets commence to be held as trading stock of such person. In terms of the provisions of paragraph 13, the taxpayer will in such circumstances be treated as having disposed of the assets for a consideration equal to the market value at the time that such assets commence to be held as trading stock.

It is submitted that the provisions of section 22 need to be amended to take account of the introduction of CGT.

6.2 It may happen that certain items of trading stock cease being held as trading stock and are held on capital account. In such circumstances, the taxpayer should be liable to normal income tax on the difference between the cost price and the market value at the time on which the assets cease to be held as trading stock. Similarly, the market value of the asset on the date that the asset no longer constitute trading stock, should be regarded as the taxpayer’s base cost for purposes of determining CGT. Once that asset is finally disposed of, the taxpayer should then be liable to CGT on the difference between the proceeds received and the market value on the date on which the assets cease to be treated as trading stock.

6.3 It will also happen that a taxpayer will start to deal in assets that were regarded as fixed assets. In such a case, the CGT provisions should seek to impose CGT on the difference between the base cost and the market value of the asset at the time that the asset ceases to be held as a fixed or capital asset. Section 22 should be amended to provide that the taxpayer will be liable to income tax on the difference between the market value at the time on which the asset becomes trading stock and the price finally realised upon its disposal. The section should provide, at paragraph 3(3)(a), that the cost of the trading stock shall be the market value of the asset on the date of change in use.

6.4 The courts have on numerous occasions accepted that a taxpayer can change intention in respect of the assets held by them and it is for this reason that it is believed that section 22 and indeed the draft provisions in the Eighth Schedule need to be revised to take account of the fact that fixed assets can become trading stock and vice versa.

7. Section 29A: life insurers
It is submitted that the formula contained in section 29A(1)(a) needs to be revised to take account of the fact that capital gains will now become taxable in the hands of the various policyholder funds. The formula currently seeks to rate expenditure heavily in favour of dividend receipts and to deny such expenditure as not having been incurred in the production of income as required under the Act. It is submitted that this should be reviewed in that an insurer will receive dividends from shares as well as taxable capital gains from the realisation thereof. The rating in the formula should therefore, in our view, be revisited and revised to take account of the fact that capital gains will in future be taxed in the hands of the insurer.

8. Section 64: donations tax
The draft Bill indicates that the current rate of donations tax of 25% is to be amended but no indication is given as to the revised rate. We are therefore unable to express a proper opinion on the consequences of this amendment in light thereof.

9. Insertion of Section 70A: records
9.1 The reporting requirements are extremely onerous and presume that those required to render returns will have access to all the required information. This is not so and will be an administrative nightmare which will result in inaccurate information being submitted.

9.2 The requirement for the disclosure of certain information is additionally burdensome to the taxpayer and, when added to the information requirements recently outlined under the residence-taxation regime, it represents a substantial and unprecedented increase in the compliance burden for South African taxpayers.

9.3 It would appear that the information called for by the Commissioner relates only to equity unit trusts and not the property unit trust industry by virtue of the fact that reference is made to unit portfolios constituting a company in terms of paragraph e(i) of the definition of "company" contained in section 1 of the Act. It is submitted that the equity unit trust and property unit trust industry should be treated on the same basis and both industries should be required to supply the information called for.

9.4 The concern that must be raised in relation to section 70A is the practicalities of the unit trust industry introducing the necessary changes to their accounting and computer systems so as to timeously supply taxpayers with the information required. The tax is to be introduced with effect from 1 April 2001 and it is submitted that it is unreasonable to expect that the unit trust industry will be in a position to amend their systems to comply with section 70A in the limited time available.

9.5 At paragraph 7, information of unit trust transactions concluded outside of a unit trust management company should be addressed.

9.6 It is believed that a copy of the document forwarded to SARS should be furnished to the unit holder.

10. Insertion of Section 70B: records
10.1 At paragraph 8, the taxpayer should be the person to determine the gain or loss. The stockbroker may not know both the purchase and selling prices.

10.2 It is believed that a copy of the annual return should be sent to the taxpayer concerned.

10.3 The reporting requirements are extremely onerous and presume that those required to render returns will have access to all the required information. This is not so and will be an administrative nightmare which will result in inaccurate information being submitted.

10.4 The requirement for the disclosure of certain information is additionally burdensome to the taxpayer and, when added to the information requirements recently outlined under the residence-taxation regime, it represents a substantial and unprecedented increase in the compliance burden for South African taxpayers.

11. Insertion of Section 73A: records
11.1 This section introduces a requirement for all taxpayers to maintain and retain substantially more records of their transactions and is particularly onerous even in respect of matters which do not include CGT.

11.2 It is submitted that the Commissioner: SARS should seriously consider introducing a CGT asset register along the lines introduced by the Australian Tax Office. This will alleviate, to some extent, the administrative burden faced by taxpayers.

11.3 The Australian Tax Office allows taxpayers to choose to enter information from their CGT records into an asset register. The creation of that register allows the taxpayer to discard records that otherwise might be required to be kept for substantial periods of time. In the event that a taxpayer in Australia chooses to keep an asset register, they are entitled to transfer the following information to the register from the normal records that would be required to be kept for CGT purposes:
- the date of acquisition of an asset;
- the cost of the asset;
- the description, amount and date for each cost associated with the purchase of the asset - these costs may include such things as stamp duty and legal fees;
- other information contained in the record that may be relevant in calculating the CGT liability;
- the date the CGT event happened to the asset;
- the capital proceeds received when the CGT event happened.

11.4 The information is required to be certified by a registered tax agent or a person approved by the Australian Tax Commissioner. If the taxpayer chooses to use an asset register in that country, they are required to keep the documents from which they have transferred the information for five years from the date the asset register entry in question has been certified. Taxpayers are required to keep the asset register entries for five years from the date the related CGT event occurs.

11.5 It is accepted that in the initial stages of introducing CGT in South Africa that SARS may not have the necessary resources to deal with this request. SARS should indicate though that this may be a possibility in the future as it will, in our view, alleviate the administrative burden faced both by taxpayers and SARS alike.

12. Section 103(2): tax avoidance
The proposed amendment gives the Commissioner the power to disregard a capital loss or assessed capital loss when determining the company’s aggregate capital gain. This, in our view, goes too far. In applying this subsection to income tax, the Commissioner is only empowered to deny the set-off of assessed losses against "tainted" income. The same should apply to capital losses, i.e. the set-off thereof should only be denied in relation to a "tainted capital gain".

13. Section 107: regulations
13.1 It is most disturbing that the draft CGT Bill has been released without the manner and method of valuations being contained therein. It is noted that the rules relating to valuations of assets for the purposes of the Eighth Schedule, will be legislated for by way of regulation and we must express our concern in this regard. This means that Parliament is not required to review such regulations prior to them coming into force. It is accepted that valuations can be made within a period of two years and the extension of the period from six months must be supported. What is of concern though is that taxpayers do not yet have the rules relating to the valuations required nor the persons that may be qualified to perform such valuations. The two-year period contained in the Eighth Schedule should only commence once the regulations have been promulgated.

13.2 Furthermore these guidelines should be incorporated into and be part of the Eighth Schedule. The valuation logistics are so enormous for the taxpaying community that the sooner these details are published as well as who is qualified to undertake the valuations the better.

13.3 The draft regulations should be made available to the public for comment and proper consultation and it is regrettable that the regulations have not yet been released.

14. Section 111B: money bills
It is proposed that section 111B be introduced into the Act. It is unclear why the section is numbered in this manner as no section 111A can be found in the principal Act. Should the proposed section therefore not be referred to as section 111A?

15. Amendment to Fourth Schedule
It is believed that provisional tax returns to be issued to taxpayers in the future, should clearly identify the existing basic amount, excluding capital gains.

INSERTION OF EIGHTH SCHEDULE IN ACT 58 OF 1962
Part 1: General
16. Definitions
16.1 It is suggested that the definition of "boat" be amended by deleting therefrom the word "for": "means any vessel used or capable of being used in ....".

16.2 "Insurer" and "individual policyholder fund" are defined as being the terms contained in Section 29A of the principal Act. No reference is made in the definitions to foreign insurers and it is suggested that this aspect be reviewed.

16.3 The definition of "permanent establishment" should, in our view, be contained in the principal Act and not the in the Eighth Schedule.

16.4 The term "recognised exchange" means in terms of paragraph (c) thereof, "an exchange outside the Republic recognised by the Minister for purposes of this Schedule by notice in the Gazette". It is unfortunate, once again, that the draft Bill does not contain the precise details of what is envisaged in this regard. It is also unclear what factors the Minister will take into account in deciding that an exchange is to be recognised.

16.5 There are a number of additional definitions that are required. There are also some terms which are defined elsewhere in the Eighth Schedule and reference to those definitions should be included in Paragraph 1, the definition paragraph. These include "assessed capital loss" and "life insurance benefit" (used in paragraph 43(b)).

16.6 In addition there is wording in the definition paragraphs which has not been repeated in the paragraphs to which the definitions relate. An example is the definition of ‘disposal’ and the wording of paragraph 11. There should be consistent and completeness of all such wording particularly in regard to definitions.

16.7 Add the words ‘of the Act’ to the end of the definitions of "individual policyholder fund" and "insurer".

16.8 The definition of "spouse" does not include lifetime or permanent partners of opposite sexes who are not married. This may well be unconstitutional. We believe this definition should be contained in Section 1 of the principal Act.

17. Application
17.1 At paragraph 2(1)(b)(ii), begs the question of the situation where a trade ceases and assets are held in a dormant situation for say 1 or 2 years of assessment and there is then a CGT event.

17.2 Paragraph 2(2), appears to make the company shareholding to be subject to CGT thus cascading CGT and will discourage foreign investment. It is also not clear as to the date upon which the 80% value is to be determined. This is an onerous requirement in that all assets will need to be valued to establish if the 80% "rule" is complied with. It is proposed that the 80% should be amended to 90% in order to maintain consistency with other legislative provisions.

Part II: Taxable capital gains and assessed capital losses
18. Capital gain
At paragraph 3, the wording of the first sentence requires amendment so as to read:
"A person’s capital gain for a year of assessment ending subsequent to the valuation date is, in respect of a disposal of an asset on or after the valuation date "

19. Capital loss
At paragraph 4, the wording of the first sentence requires amendment so as to read:
"A person’s capital loss for a year of assessment ending subsequent to the valuation date is, in respect of a disposal of an asset on or after the valuation date "

20. Annual exclusion
At paragraph 5, the natural persons’ exclusion of R10 000 is too small to be meaningful. This represents a maximum of tax foregone of R1 050 per person. This exemption should be no less than R25 000. R25 000 is suggested as it is the amount that may be donated free of donations tax each year and is equivalent to income tax foregone of R2 625 an increase of R1 575 (i.e. R2 625 – R1 050) over the current exclusion. This will reduce the administrative burden on SARS and taxpayers alike.

21. Taxable capital gain
21.1 It appears that paragraph 10(c) will include untaxed policyholders funds which we believe should not be subjected to CGT.

21.2 It is submitted that the wording contained in paragraph 10 dealing with the taxable capital gain should specifically state that the amount of the gain included in respect of the untaxed policyholder fund shall be an amount of 0%.

21.3 When one has regard to the present construction of the Eighth Schedule, it is would appear that 50% of the capital gains realised by the untaxed policyholder fund will be included in taxable income. This, clearly, does not appear to be the intention when one has regard to the Explanatory Memorandum on the Bill and it is for this reason that paragraph 10 should, in our view, be specifically amended to refer to the position of the untaxed policyholder fund.

Part III: Disposal and acquisition of assets
22. Disposals
22.1 Paragraph 11 treats assets donated as if they were disposed. The deemed disposal of assets that have been donated is harsh. It would appear that this means that CGT will apply in addition to donations tax. Non-arm’s length transfers between connected parties are already covered, so there is no need to attack bona fide donations. Bona fide donations will be discouraged by the proposed legislation.

22.2 Paragraph 11(1)(e) requires further consideration as such a distribution already creates a liability for STC and this will constitute the double taxation of the same amount.

23. Part-disposals
23.1 At paragraph 12, these provisions are onerous and could be costly to the taxpayer as there would be a need to determine the market value of the part retained which may be either a minor portion or a major portion each with their own difficulties. Is it not possible to defer the liability for CGT until the disposal proceeds exceed the base cost? The market value of the part retained will always be artificial until such time as a disposal actually takes place. This would also defer losses until such time as the full disposal has taken place.

23.2 It is clear that practical difficulties will be encountered where a part of an asset is disposed of and the valuation rules relating to the part disposal become critical. It is hoped that the regulations to be issued on valuations will address this issue.

Events treated as disposals and acquisitions
24.1 Emigration of individuals
Paragraph 13 contains certain rules regarding the above and particularly persons emigrating from South Africa. This paragraph provides that any person who ceases to be a resident of South Africa is deemed to have disposed of all assets, other than those listed in paragraph 2(1)(d) of the Schedule. This provision will serve to:
- restrict the free movement of individuals, in a way similar to exchange controls;
- discourage foreign nationals from settling here;
- tax individuals on emigration while still restricting the transferability of their funds out of South Africa, due to exchange control restrictions;
- force the disposal of some assets for cash just so that the tax can be paid.
As a result of the above, the exchange control restrictions applicable to immigrants need to be reviewed.

24.2 This paragraph contains rules regarding persons who become ordinarily resident in South Africa for the first time. In essence it is specified that such persons shall be regarded as having disposed of and reacquired each of their assets for a base cost equal to the market value of the asset at the date on which that person commences to be a resident of South Africa. It is submitted that the provisions should be extended to confer the same concession upon controlled foreign entities held by non-residents before they become resident in South Africa. The current provisions would appear to apply only to the non-resident who becomes resident in South Africa and not to the assets held in companies owned by them when they become resident in South Africa for tax purposes.

25 Time of disposal
25.1 We are of the opinion that a refundable deposit received pending fulfilment of the contractual conditions should be excluded from the ambit of paragraph 14(1)(a) of the Act.

25.2 It is submitted that the last sentence in paragraph 14(1)(a) should be amended to read as follows:
"and is in any other case the date of change of ownership".

25.3 It is submitted that paragraph 14(1)(d) should be amended along the following lines:

"ending of ownership of an incorporeal asset by redemption, cancellation, release, discharge, expiry, abandonment, surrender, exercise of an option or conversion, the date that the interest in the asset terminates."

26. Disposal of partnership asset
26.1 The normal income tax rules relating to the taxation of partnerships are complex and it is submitted that the legislation dealing with taxation of partnerships needs to be reviewed and amended at some time. It is submitted that paragraph 15 of the Eighth Schedule is far too brief when it is comes to the transactions that may take place in respect of interest in a partnership. The Eighth Schedule should deal with the dissolution of the partnership as well as amendments in the profit sharing percentages applicable to the various partners. A partner’s interest in a partnership may change as a result of the admission of a new partner or increase as a result of the withdrawal of a partner. Furthermore, the withdrawal of the partner from a partnership will result in the partner being regarded as having disposed of his interest in the partnership and will in such circumstances be required to account for capital gains realised as a result thereof.

26.2 By virtue of Section 1 of the principal Act, partners are deemed to be regarded as connected persons in relation to each other. Invariably the withdrawal or admission of a partner is regulated by a partnership agreement and in many cases the assets are not revalued each time that a partner is admitted or that a partner withdraws. This appears to be problematic by virtue of the fact that partners are in fact connected persons.

26.3 It is submitted that the provisions dealing with the disposal of partnership assets are far too brief when one has regard to the complexities relating thereto.

26.4 We should allow the partnership balance sheet to be used in regulating the values attributable to changes in the partnership as is the case in the United Kingdom. Our "connected person" rules would not currently allow for this.

27 Disposal by spouse married in community of property
It is submitted that paragraph 16(c) should be renumbered 16(b).

Part IV: Disregarded disposals and limitation of losses
28. Aircrafts, boats and certain rights and interests
Paragraph 17(c) refers to "any fiduciary, usufructuary or other like interest less than 50 years in duration". It is unclear when the 50 years should be determined i.e. at the date that the right was initially granted or must one have regard to the number of years remaining after the effective date, being 1 April 2001. It is submitted that the provisions contained in paragraphs 17(c) and (d) need to be clarified so as to specify the manner to be used in determining the period of 50 years.

29. Designated intangible assets
29.1 Paragraph 18 provides that capital losses in respect of the disposal of designated intangible assets acquired prior to the valuation date must be disregarded in determining the aggregate capital gain or aggregate capital loss. It is submitted that this is highly inequitable in that any gains realised upon the sale of businesses including gains realised on goodwill and intellectual property, after the valuation date, will be liable to capital gains tax whereas it is intended not to recognise losses relating to intangible assets acquired prior to the valuation date. The decision has been made to subject all assets to capital gains tax in respect of disposals effected on or after 1 April 2001. Any gains or losses realised in respect of the difference between the proceeds received and the base cost or value at valuation date should be subject to tax or allowable for offset against future gains as the case may be.

29.2 Most taxpayers that own intellectual property referred to in paragraph 18(2)(b) of the Eighth Schedule would be claiming deductions therefor in terms of section 11(gA) of the principal Act. Such items should therefor not impact upon the determination of capital gains or losses.

29.3 It is submitted that the mischief that the Commissioner seeks to prevent can be addressed via proper valuation rules and it is for this reason that the rules on valuations should in our view be contained in the Eighth Schedule itself and not merely be published by way of a regulation under section 107 of the principal Act.

Part V: Base cost and proceeds
30. Base cost of asset
30.1 It is submitted that paragraph 22(1)(a) should refer to not only marketable securities acquired and taxed under section 8A, but also any other assets that have been included in the taxpayer’s income under paragraph (i) of the gross income definition.

30.2 Paragraph 22(1)(b) should be reworded along the following lines:

"The following expenditure actually incurred as expenditure directly related to the acquisition or disposal of that asset".

30.3 It is submitted that the base cost of the asset should include the non-capital costs incurred relating to the holding of the assets in question that were not allowed for normal tax purposes. It is noted that the Australian Tax Office specifically allows non-capital costs incurred in connection with the ownership of CGT assets. It is specifically stated in the Australian CGT rules that interest, rates, land taxes, repairs and insurance premiums can be included in the cost base of assets. That country also allows the deduction of non-deductible interest on borrowings to refinance a loan used to acquire a CGT asset and on loans used to finance expenditure incurred to increase an asset’s value. It is specifically provided that non-capital costs can only be included in the base cost in the event that a deduction was not allowed for income tax purposes in any year.

30.4 Where, for example, a taxpayer owns a holiday home and does not derive any rental income therefrom, the holding costs would not have been allowed as a deduction for normal income tax purposes. Such costs would have included any interest paid to finance the purchase of the asset, rates and taxes, water, lights, repairs etc and other direct expenditure. In the event that the base cost does not take account of such items, it is submitted that the taxpayer is going to be subjected to CGT even though an economic loss may be incurred. The issue is once again best illustrated by way of an appropriate example.

Example:
Taxpayer acquires a holiday home on 1 April 2001
for an all inclusive cost of R100 000

Taxpayer sells the property on 31 March 2006
for a net amount of R150 000
Under current provisions capital gain is R 50 000

Tax payable is 10,5% (i.e. 25% x 42%) R 5 250

However, the taxpayer incurred the following
non-capital costs which would not have qualified
as a deduction for normal tax purposes:-

Interest on loan to finance property R 14 500
Insurance R 6 000
Rates and taxes R 7 200
Water and lights R 7 200
Repairs R 2 000
Total cost per annum R 36 900
Total costs over five years (costs assumed to be
constant over the period) R184 500

Economic result
Cost of property R100 000
Add non-capital costs R184 500
Total actual costs R284 500
Less: net proceeds R150 000
Economic loss (R134 500)

30.5 It is accepted that the taxpayer has enjoyed the use of the property and that this is not valued in any way. However, when one includes the non-capital costs as we believe one should, an economic loss of R134 500 is incurred by the taxpayer in disposing of the property in question. However, under the proposals contained in the Bill, the taxpayer will be liable for tax amounting to approximately R5 250 by virtue of the fact that the non-capital costs which were not allowed as a deduction for income tax purposes, are disregarded in determining the capital gain. It is submitted that this is inequitable and needs to be revisited.

30.6 The provisions of paragraph 22 should deal with those circumstances where capital assets are acquired by a person from a connected person. The position seems to be catered for in respect of disposals in that paragraph 26 deals with the disposal of assets to a connected person, but it is does not appear that paragraph 22 contains a similar provision. These provisions should be considered so as to ensure that the Eighth Schedule contains rules similar to those contained in section 31 dealing with transfer pricing in respect of the sale of goods and services between connected persons located in South Africa and located abroad.

30.7 At paragraph 22(1)(a), insert the word ‘gross’ between the words ‘person’s’ and ‘income’ in the last line.

30.8 At paragraph 22(2)(b), will such expenditure be allowed in a later year when it is paid? This is contrary to the general accounting conventions of taking all costs into account both on an accrued and paid basis. Whereas we can understand that the provisions of this clause are to prevent abuse or fraud, the consequences of the deduction not being allowed do not appear to be adequately addressed. Furthermore the disallowance could result in a taxable gain in year 1 and a tax loss in year 2 which cannot be set-off against any available taxable gains. It is suggested that if possible the tax return for the year of the disposal should be reopened and reassessed when the expense has been paid and claimed as part of the base cost.

31. Election in respect of assets acquired prior to valuation date
31.1 The provisions of sub-paragraphs (3) to (10) of paragraph 23 are complicated and not very clear and a detailed explanatory memorandum is required which sets out how these provisions are to be applied.

31.2 At paragraph 23(1), the base cost of an asset acquired before the valuation date is the sum of the "valuation date value" and the post-valuation date expenditure.

31.3 At paragraph 23(2), where the proceeds on disposal of the asset exceed the expenditure (i.e. asset disposed of at a profit), the person disposing of the asset shall (subject to sub-paragraphs (3) and (6)) determine the valuation date value as any of the following:

(a) market value on valuation date
(b) 20% of the proceeds
(c) time apportionment base cost

Example 1:

Proceeds exceed expenditure, therefore person can determine valuation date value as any of the following:
(a) Market value on valuation date = 90
(b) 20% of proceeds (20% of 95) = 19
(c) Time apportionment value (50 + 5/7*(95 –50)) = 82.14

Determination of capital gain:-
Proceeds 95
Less: Base cost
Valuation date value (select market value) 90
Post valuation date expenditure 0
90
Capital gain 5

31.4 It appears that the intention of this provision is to grant the person disposing of the asset the right to elect any one of three valuation date values. First, he can elect to substitute the market value, subject to compliance with the requirements of sub-paragraph 6 and the limitation contained in sub-paragraph 3. Secondly, he can use the time apportionment base cost. However, if one considers the provisions of the proposed Section 73A regarding record keeping and the onus of proof contained in Section 82, it appears that if he is unable to produce proof of expenditure actually incurred, the time apportionment base cost may not be allowed. Thirdly, as a last resort, he can use a deemed base cost of 20% of the proceeds.

31.5 At paragraph 23(3), where the person has adopted the market value as the valuation date value in terms of paragraph 23(2)(a) (i.e. the asset was sold at a profit) and that market value exceeds both the proceeds and the expenditure incurred before the valuation date, then the valuation date value is deemed to be the higher of:
(a) the expenditure incurred before the valuation date; or
(b) the proceeds less the expenditure incurred after the valuation date

Example 2

Proceeds exceed expenditure, therefore in terms of paragraph 23(2), person must determine valuation date value as any of the following:
(a) Market value on valuation date = 100
(b) 20% of proceeds (20% of 95) = 19
(c) Time apportionment base cost (50 + 5/7*(95 –50)) = 82.14

Assume person selects market value of 100 as valuation date value. However, as market value (100) exceeds both proceeds (95) and expenditure incurred before the valuation date (50), paragraph 23(3) applies and the valuation date value is deemed to be the greater of:

(a) the expenditure incurred before the valuation date = 50; and
(b) the proceeds less the expenditure incurred after the valuation date 95 – 0 = 95
Determination of capital gain or loss
Proceeds 95
Less: Base cost
Valuation date value 95
Add: Exp incurred after value date 0
95
capital gain/loss 0

31.6 Apparently, paragraph 23(3) is meant to ensure that the seller cannot use the market value election to claim a capital loss when he is has made an economic profit. The provision substitutes as the valuation date value, the proceeds less the expenditure incurred after the valuation date, thereby ensuring that the capital gain or loss will be nil.

31.7 Actually the valuation date value is the greater of:

(a) the proceeds less the post-valuation date expenditure; or
(b) the expenditure incurred up to the valuation date.

31.8 However, as it is a requirement of paragraph 23(2)(a) that the proceeds exceed the total expenditure, it follows that the proceeds reduced by the post-valuation date expenditure must exceed the total expenditure reduced by the post-valuation date expenditure. It is therefore difficult to imagine under what circumstances (b) could be greater than (a) for a disposal contemplated in paragraph 23(2)(a).

31.9 At paragraph 23(4), where the proceeds from the disposal of the asset do not exceed the expenditure (the asset is sold at a loss), the person who disposed of the asset shall, subject to sub-paragraphs (5) and (6), determine the valuation date value as the lower of:
(a) the market value on the valuation date; or
(b) the time apportionment base cost.

Examples 3 and 4

Proceeds do not exceed expenditure, therefore in terms of paragraph 23(4), person must determine valuation date value as the lower of:
(a) Market value on valuation date = Example 3 50
= Example 4 30
(b) Time apportionment base cost (70 + (5/7*(40 – 70)) = 48,47

Determination of capital gain or loss

Example 3
Proceeds 40,00
Less: Base cost
Valuation date value
Lower of: Market value 50,00
Time apportionment base cost 48,47
48,47
Add: Post valuation date expenditure 0,00
48,47
Capital loss 8,47

Example 4
Proceeds 40,00
Less: Base cost
Valuation date value
Lower of: Market value 30,00
Time apportionment base cost 48,47
30, 00
Add: Post valuation date expenditure 0,00
30,00
Capital gain (subject to 23(5)) 10,00

31.10 From the wording of this provision, it appears that the substitution of the valuation date market value is not an election. It must be substituted if it is lower than the time apportionment base cost.

31.11 Conversely, if the time apportionment base cost is lower than the valuation date market value, the seller does not have the option to substitute the market value. He is obliged to use the time apportionment base cost.

31.12 It is submitted that these provisions are anomalous. Sub-paragraph 6 states that a person can only adopt the market value if certain requirements are met. This implies that the adoption of the market value is an election whereas sub-paragraph 4 implies it is obligatory in certain circumstances. What if a person contemplated in paragraph 23(4) has not complied with the requirements of sub-paragraph 6. For example, an asset acquired before the valuation date is sold in 2010 at a loss and no valuation was performed at 1 April 2001. How would the person disposing of the asset comply with the requirements of paragraph 23(4)?

31.13 Furthermore, this provision presupposes that the seller has sufficient records to determine the time apportionment base cost. What if the seller is unable to determine either the market value or the time apportionment base cost?

31.14 At paragraph 23(5), where the person has adopted the market value of an asset acquired before the valuation date in terms of paragraph 23(2)(a), and both the proceeds and the valuation date market value are less than the expenditure incurred before the valuation date, the person shall determine the valuation date value as the higher of:
(a) the valuation date market value; or
(b) the proceeds less the expenditure incurred after the valuation date.

31.15 If the person adopted the market value under paragraph 23(2)(a), then it is difficult to see how the proceeds could be less than the expenditure incurred before the valuation date. The paragraph 23(2)(a) election only applies where the proceeds exceed the total expenditure incurred on the asset. For the purposes of the example it has therefore been assumed that the person drafting the Bill meant to refer to a seller who has adopted the valuation date market value in terms of the provisions of paragraph 23(4), which deals with the situation where the proceeds are less than the expenditure.

Example 5
Refer to the determination of the capital gain in Example 4 above, illustrating the operation of paragraph 23(4). As both the proceeds and the valuation date market value are less than the expenditure incurred before the valuation date, the valuation date value is determined as the higher of:
(a) that market value = 30; or
(b) the proceeds less the post valuation date expenditure: (40 – 0) = 40
The determination of the capital gain, taking into account paragraph 23(5), is therefore as follows:
Proceeds 40,00
Less: Base cost
Valuation date value
Higher of: Market value 30,00
Proceeds less post-valuation
date expenditure 40,00
40,00
Add: Post valuation date expenditure 0,00
40,00
Capital gain/loss (subject to 23(5)) 0,00

31.16 Apparently, the intention of this provision is to ensure that, although the seller is obliged to substitute the market value in terms of paragraph 23(4) if it is lower that the time apportionment base cost, he cannot be taxed on a capital gain if he has made an economic loss. The effect of this provision is that the capital gain is reduced to nil. However, as stated above, these provisions are still unfair in that he is apparently forced to adopt the market value with a zero capital loss even though on the time apportionment basis he would have had a capital loss of 8.47.

31.17 At paragraph 23(6), a person may, in terms of sub-paragraphs (2)(a) and (4) adopt the market value of an asset (other than a listed financial instrument or a long-term insurance policy) as the valuation date value, only if that person has:

(a) established the market value in conformance with the regulations contemplated in S107(1)(f); and
(b) furnished a return within 2 years in such form as the Commissioner may prescribe.

31.18 Paragraph 23(8)(b) refers to insurance policies issued under the Long-Term Insurance Act of 1998. No regard is had to the fact that taxpayers may hold policies issued by an overseas insurance company that does not carry on business and is accordingly not governed by the provisions of the Long-Term Insurance Act. Should the paragraph not be amended to deal with this scenario?

31.19 When paragraph 23(9) is analysed, it would appear that SARS has changed its views on how to determine a gain where the asset was acquired before the effective date and the taxpayer uses the time apportionment basis. This is best illustrated by way of an example.

Example:
An individual acquired a holiday home 10 years prior to the effective date for R250 000 and sells the property on 1 April 2006 for R850 000.

CGT due per SARS Guide to CGT dated 23 February 2000
Proceeds R 850 000
Less: Base cost R 250 000
Capital gain R 600 000
Time based apportionment applies:-
[R600 000 x 5 / (10 + 5)] taxable capital gain = R 200 000
CGT due R 21 000

CGT due per draft Bill dated 12 December 2000
Proceeds R 850 000
Less: base cost *R 450 000
Taxable capital gain R 400 000
*being cost of R250 000 plus (R850 000 -[R250 000) 5/15])
CGT due R 42 000

Increase in tax due R 21 000

31.20 It is submitted that the Bill should be reworded such that the intention contained in the SARS guide on CGT is given effect to.

31.21 General comments
31.21.1 It is submitted that, in contrast to most of the draft CGT legislation, which is written in clear layman’s language, the provisions of paragraph 23 are complex and difficult to understand. These provisions should be redrafted in a manner such that the intention of SARS can be clearly understood.

31.21.2 It is submitted that the election to adopt the valuation date market value was supposed to alleviate the retrospective application of the legislation in that if the seller did not have adequate historical records of actual expenditure, he could obtain a valuation at 1 April 2001. Thereafter, only increases and decreases in the value of the asset accruing after 1 April 2001 would fall within the CGT net.

31.21.3 However, both paragraphs 23(3) and 23(4) appear to require the seller to determine the actual expenditure incurred before the valuation date and substitute that actual expenditure (sub-paragraph 3) or the time apportionment base cost (sub-paragraph 4) in certain circumstances. These provisions presuppose that the seller has kept historical records of the type envisaged in the CGT legislation, even though this was not a statutory requirement at the time the asset was acquired.

31.21.4 These proposals are not supported. Provided the seller has obtained a valuation in accordance with the regulations, he should be able to adopt it, regardless of whether the time apportionment base cost was greater or less than the market value or whether the asset was sold for a profit or a loss.

31.21.5 It is also submitted that the options for determining the valuation date value should be the same, whether the asset is sold at a profit or a loss.

32 Averaging of value of shares owned on valuation date
32.1 It is submitted that SARS should consider preparing a schedule of the average prices envisaged in paragraph 24 of the Schedule for the use of the taxpaying public. Clearly the prices of shares quoted on the Johannesburg Securities Exchange SA are known and a schedule should be prepared and gazetted for use by taxpayers for the purposes of CGT.

32.2 This will avoid differences occurring due to misinterpretations or different published figures being used by taxpayers.

33. Disposal to connected person or by means of non-arm’s length transaction
33.1 At paragraphs 26(a) and 26(b), it is not clear as to how the market value of the asset is to be determined as at the date of disposal, which may be an amount other than that at which, unconnected persons may already have contracted.

33.2 It is submitted that SARS should define exactly what is meant by a non-arm’s length transaction. The Australian guide to CGT deals with the question of dealing at arm’s length at page 5 thereof and states as follows:
"You are said to be dealing at arm’s length with someone if each party acts independently and neither party exercises influence or control over the other in connection with the transaction. The law looks at not only the relationship between the parties, but also the quality of the bargaining between them".

33.3 It is submitted that the Eighth Schedule should define what is envisaged by the term "non-arm’s length" and that the commentary contained in the Australian guide on CGT is useful in this regard.

34. Capital losses arising from disposals to connected persons
Paragraph 27 creates a connected persons problem. It may well be that for the purposes of a single transaction the parties are connected persons, after which such relationship may no longer exist. Accordingly subsequent transactions with such formerly connected person may never occur which would allow disregarded capital losses in terms of sub-paragraph (1) to be deducted from subsequent capital gains. It would be far more equitable to require any transactions with connected persons or not at arm’s length to be accounted for on the basis of an independently determined market value for which rules of valuation can be legislated.

35. Disposal by means of donation or for no consideration
35.1 The heading to paragraph 28 refers to "or for no consideration" whereas the text of the paragraph refers to "for a consideration not measurable in money".

It is submitted that the anomaly should be rectified.

35.2 At paragraph 28, an explanation is required as to how the market value is to be determined in terms of paragraph 26 of the consideration of a donation not measurable in money.

36. Disposal to and from deceased estates
36.1 At paragraph 29, the proposed wording will result in bequests to spouses receiving no roll-over relief from CGT even though they are currently exempt from estate duty. This should be reconsidered.

36.2 At paragraph 29, whilst it would be reasonable to treat a deceased as having disposed of his or her assets to a deceased estate as provided for, it is not equitable for those assets to be passed on to heirs, legatees or trustees at the base cost to the deceased estate. Effectively this would eliminate from the hands of the deceased estate all capital gains or losses which may occur whilst such assets are held and administered by the deceased estate and are handed over ultimately to the beneficiaries. These provisions need to be reconsidered and the deceased estate and heirs should have the option to either apply the proposed legislation or to cause the estate to render a return at the time of handing over the estate assets based on the market values of those assets. This would be of particular value in an estate which has some assets which have capital gains and other asset which have capital losses attributable to them, and the respective assets are to be distributed to different heirs, legatees or trustees who would cease to enjoy the ability to set off capital losses against capital gains from those assets.

37. Currency conversion
37.1 Paragraph 30 provides that the proceeds arising from the disposal of an asset shall be converted to South African currency at the ruling exchange rate applicable on the date on which the proceeds accrue to the taxpayer. The paragraph then provides that the base cost of the asset shall be converted to the currency in South Africa at the ruling exchange rate applicable on the date on which the amount in question was paid or became due and payable. It is submitted that this is inequitable in that the taxpayer will be taxed on the depreciation of the Rand vis-à-vis other currencies. It is submitted that it is will be more equitable if the capital gain were determined by deducting from the proceeds the base cost incurred in the foreign currency and converting the capital gain at the ruling exchange rate on the date on which the proceeds accrue in the taxpayer’s favour. This basis is in fact used by controlled foreign entities under Section 9D of the Act. All taxpayer’s should, in our view, be treated equally.

This is best illustrated by way of an example.

Example:
SA resident buys a property in the United Kingdom for £100 000 on 1 April 2001 when £1 equates to R11,50.

Assume property sold for £150 000 on 1 April 2005 when £1 equates to R16.

Capital gain can be calculated in one of two ways:-

Ignore depreciation in the Rand
Net selling price £ 150 000
Base cost £ 100 000
Taxable capital gain £ 50 000
Converted into Rands R 800 000
Capital gains tax due @ 10,5% R 84 000

Take account of depreciation in the Rand
Base cost in Rands £100 000 @ R11,50 R1 150 000
Net selling proceeds in Rands £150 000 @ R16 R2 400 000
Taxable capital gain R1 250 000
Capital gains tax due @ 10,5% R 131 250

Additional CGT due to the depreciation of the Rand R 47 250

The gain, in our view, should be determined without taking account of the depreciation of the Rand.

37.2 The above will discourage taxpayers from entering into normal commercial transactions for fear of the liability for CGT, which would reduce their capital base available for investment in foreign currency. It is particularly harsh that the base cost in foreign currency must be converted into South African legal tender as must the disposal proceeds. This paragraph may require the taxpayer to repatriate part of the foreign asset’s value in order to settle the CGT liability.

38. Gain on cancellation or reduction of obligation
We unfortunately are unable to comment on paragraph 32 as no text has been provided in the draft Bill made available to us.

Part VI: Primary residence exclusion
39. Definitions
39.1 At paragraph 33, "an interest" - this applies to companies and close corporations but not to trusts. It is believed that the definition should include trusts.

39.2 The definition of "primary residence" requires that the person who owns the residence "uses for domestic or private residential purposes" the residence in question.

39.3 Paragraph 31 contains a definition of "primary residence" and the one question that must be raised is the treatment of a residence used mainly for such purposes but also partly for business purposes. It is common in business today that many persons work from home for example, the general practitioner or attorney who lives and works from the same premises such that a small portion of the residence is used for business purposes. In light thereof should the definition of primary residence at (b)(ii) not be reworded along the following lines:
"uses solely or mainly for domestic or private residential purposes"?

40. General principle
40.1 Paragraph 34 of the Schedule specifically provides that in the event that the capital gain or loss exceeds R1million on the disposal of primary residence, any excess will be taken into account for CGT purposes. It is submitted that this is inequitable when one has regard to the fact that South Africa does not allow taxpayers to claim interest on their personal mortgage bonds nor are other expenses relating to the primary residence deductible for income tax purposes. In this regard attention is drawn to the argument submitted above regarding the determination of the base cost of the asset disposed of contained at paragraph 30.4 of this submission. If one looks at the true economic position of the taxpayer, it is more than likely that the total costs incurred by the taxpayer on their residential property will in fact exceed the proceeds received upon the disposal of the property in question. It is for this reason that we cannot agree to the proposal that only the first R1million gain or loss realised on the disposal of a primary residence be disregarded for CGT purposes.

40.2 This paragraph may entice taxpayers to sell their homes when the estimated gain on their home nears R1 million so as to recommence the accumulation of value, if at all possible, so as to derive subsequent tax-free gains. Of course the costs of such transaction would have to be considered but such transaction may be transacted earlier than they would otherwise occur.

40.3 Paragraph 34(2) provides that one residence may be regarded as the primary residence and this would imply that a taxpayer must make an election in this regard. The legislation should specify the manner in which the election is to be made and more importantly, which taxpayer is to make the election, particularly where taxpayers are married or regarded as married. If, for example, both the husband and wife each own a residence and they each reside in one of the properties in question, it appears that an election will of necessity have to be made as to which property will be regarded as the primary residence. Rules should therefore be specified therefor.

40.4 If husband and wife each own a residence in their own names and reside separately, it appears both residences would qualify as primary residences. It is submitted that it is only where both of the residences are owned by the one spouse that an election must be made as to which residence will be the primary residence. An example of this is the position of split families or families such as where one spouse resides in Cape Town during the week and the other resides and works in Johannesburg.

40.5 At paragraph 34(2), there is no stated procedure for the determination of which, if more than one, residence is the primary residence.

40.6 This paragraph should, in our view, deal with customary and polygamous marriages. This matter was discussed when the CGT legislation was debated at SARS on 18 October 2000 but it does not appear that the complexities relating to the realities of the various South African communities has been taken into account.

41. Size of residential property qualifying for exclusion
41.1 It is believed that the valuation of properties may present practical problems in applying paragraph 35.

41.2 There is also no provision made for the method of apportionment of the areas or of their base costs or values.

42. Disposal and acquisition of primary residence
42.1 Paragraph 37 deals with the circumstances where the residence is acquired and renovated prior to the taxpayer taking up residence therein. It is submitted that the Schedule should also cater for those circumstances where a taxpayer moves out of their normal residence in order to renovate or improve same with a view to returning thereto later. The Schedule does not currently cater for this eventuality.

42.2 The period of two years may be unreasonable where it can be shown that sub-paragraph (a) is applicable and the taxpayer finds it impossible to conclude a sale of the primary residence. The Commissioner should have the power to extend the period subject to the taxpayer making an application for an extension of time prior to the expiry of the said two-year period.

43. Rental periods
At paragraph 38, in terms of the apportionment in respect of periods of absence from the primary residence, it seems that you are worse off if you do not let your house whilst you are away than if you do. See the comments made in paragraph 37 above. This inconsistency needs to be addressed or clarified.

44. Non-residential use
At paragraph 39, the portion of the primary residence used for ‘non-residential use’ is disqualified from the exemption, but it is not clear what this includes. What about a home offices? Or the occasional letting of a granny flat? Or the taking in of a paying boarder? Possibly a de minimus rule is required in this instance.

45. Transfer of a primary residence from a company
45.1 Paragraph 40 deals with the transfer of a primary residence from a company controlled by the natural person and confers certain concessions on the taxpayers in question. The concession contained in the schedule must be welcomed and supported in that it is will allow persons who have registered a residence in companies and close corporations to transfer such properties into their own names without incurring transfer duty or stamp duty.

45.2 It is unfortunate though that no recognition is granted to those circumstances where the primary residence is held by an inter vivos trust of which the natural person, their spouse or family are beneficiaries. Many primary residences are owned by companies owned by inter vivos trusts. It is our view that section 9(16) of the Transfer Duty Act should be redrafted to take account of these circumstances so as to allow taxpayers to transfer such primary residences free of transfer duty should they so wish.

45.3 In the event that the company or close corporation disposes of the primary residence to the natural person an exemption should be granted on any capital dividend awarded by the close corporation or company to its shareholder upon its deregistration or liquidation. No CGT should, in our view, be payable under these circumstances as this would negate the concession granted in the draft Bill.

45.4 It is submitted that the rules relating to the primary residence exclusion should contain rules relating to a residence owned by the taxpayer for a dependent relative such as a parent or a spouse’s parent. This relief is available in other jurisdictions and it is does often happen that the children are required to provide or acquire a home for occupation by their parents. Such a home should be recognised as a primary residence for the dependent relative in that the relative will not have a primary residence of their own and this will not, in our view, reduce the base of the tax.

45.5 The rules regarding the primary residence should also deal with the situation where the heir of the deceased inherits the deceased’s primary residence and disposes thereof shortly after inheriting the asset or chooses to occupy the property as their own residence. Other jurisdictions grant relief in these particular circumstances and consideration should be given to such relief in this country.

45.6 At paragraph 40, consideration should be given to extending the concession given in respect of transfer duty so as to exclude from STC any gains occurring in the company on the transfer of the property and distributed as dividends in order to give transfer of the property. Furthermore, this paragraph should be re-worded to provide that the 20% rule and time apportioned base-cost dealt with in paragraph 22(2) shall not apply where this paragraph applies.

Part VII: Other exclusions
46. Assurance and retirement benefits
46.1 It is submitted that the terms used in paragraph 43 particularly "a life insurance benefit" and "a lump sum in respect of an endowment policy" should be defined in the Schedule.

46.2 Unfortunately the Schedule excludes from its ambit only those benefits received by the original beneficial owner or nominee of the relevant insurance policy. It is accepted that in the draft CGT guide issued by the Commissioner: SARS on 23 February 2000, that so-called second hand policies would be subjected to tax twice namely, firstly in the hands of the insurance company, and again in the hands of the owner. It is submitted that this is highly inequitable and results in economic double taxation and this proposal cannot be supported for the reasons stated below.

46.3 It is appropriate to refer to the amendments that were introduced by way of the Income Tax Act, Act No 113 of 1993, whereby the Sixth Schedule of the principal Act was repealed with effect from 1 March 1993.

The Sixth Schedule was specifically repealed in order to remove the punitive taxation borne by second hand policies and the explanatory memorandum published with Act 113 of 1993, is relevant in this regard:

"The Bill gives effect to what is termed the four-fund approach for the taxation of life insurers and their policyholders, as recommended by the Jacobs Committee. This approach is based on the recognition that insurers hold and administer certain of their assets on behalf of various categories of policyholder, while the balance of their assets represents, in the case of proprietary insurers, shareholders’ equity, and in the case of mutual insurers, funds to which current policyholders are not entitled and which should thus be treated as corporate funds. The application of this approach requires that insurers allocate their assets and liabilities to separate funds representative of the various policyholder or corporate interests, and that each fund be taxed as a separate entity in accordance with the applicable taxation principles.

The Sixth Schedule to the principal Act defines what are termed standard policies, and imposes tax on any gains derived from policies which do not qualify as standard policies. Because those gains have already borne tax under section 28 of the principal Act, the Sixth Schedule in fact imposes punitive, double taxation, and it is thus in effect a regulatory rather than a fiscal measure. The Bill accordingly proposes the abolition of the Sixth Schedule, and at the same time introduces amendments to the Insurance Act which are designated to demarcate the nature of the business which insurers may undertake."

46.4 The Commissioner has thus accepted the concept of the trustee principle such that the insurer pays the income tax on behalf of the various policyholders at the rates applicable to the different classes of policyholders. This is currently enshrined in section 29A of the principal Act and in accordance therewith, the insurer will be liable to CGT on capital gains realised at the rate of tax applicable to the various policyholders. To subject the individual investor to CGT on the amount received from a so-called second hand policy, clearly results in double taxation which is inequitable and cannot be supported.

46.5 The level of policy surrenders and lapses in South Africa are relatively high and the market in second hand policies has developed and evolved such that persons who are no longer able to meet their obligations to the insurance company, can dispose of their interest in an insurance policy to another person who has the financial means to continue the required premiums into the policy concerned. The investor in such a policy is not entitled to claim any deduction of premiums paid as a deduction for tax purposes and will either receive payments out of the policy from time to time or surrender the policy upon its maturity. The investor in such a policy receives from the insurance company an amount comprising in essence three constituent parts:
- a return of premiums paid;
- income, comprising interest, rentals and dividends that would have already been liable to tax in the hands of the insurance company;
- distribution of realised capital gains which will now be subjected to CGT in the insurer’s hands.

46.6 The intention to subject to CGT amounts received from second hand policies flies in the face of one of the basic tenets of taxation namely that of equity and furthermore, we do not believe there is any sound reason or principle why such amounts should be subjected to tax twice. This is also best illustrated by way of an example:
Assume an investor acquires a second hand policy for R300 000 on 1 April 2001.

In the hands of the insurer:
Interest received R14 500
Rental received R 8 000
Domestic dividends received R 3 000
Capital gain realised on sale of shares R 9 000

Taxable income arrived at as follows:
Interest received R14 500
Rental received R 8 000
Taxable Capital Gain (25% of R9 000) R 2 250
Taxable income R24 750
Tax due thereon at 30% R 7 425
Net amount available to policyholder R 20 325*

*that is R24 750 less R7 425 add tax exempt
dividends R3 000.

Assume that the owner of the policy part surrenders
the policy and receives the after tax amount in the
same year

Capital gain as per proposed bill R20 325,00
Tax due thereon at 10,5% (25% x 42%) R 2 134,12

CGT is paid on the exempt dividend awarded to policyholder and is paid once again on the after tax income awarded to the policyholder as well as the capital gain that has already been taxed in the hands of the insurer.

Total tax on income is R9 559,12 i.e. an effective rate of 38,6%.

46.7 It is clear therefore that the investor in a second hand policy is far worse off than if they were to invest in any other asset and the result of the decision to subject such proceeds to CGT twice will, in our view, result in the removal of such funds from investment in the hands of the insurance companies thereby reducing the tax ultimately payable by the insurers of this country.

46.8 From the example supplied above, it is clear that the second hand owner of the insurance policy will effectively pay a total amount of R9 559,12 in taxation whereas the first owner is only liable to tax in an amount of R7 425. It is submitted that the fact that the policy is second hand, should not in any way determine the quantum of tax payable on the income derived therefrom. What is also of concern is that amounts that would otherwise have been exempt, such as domestic dividends received by the insurer, will now become liable to CGT to the extent that such amounts are received by the second hand owner of the policy. The fisc has determined that the average income tax rate applicable to individual policyholders is 30% whereas the second hand owner will be subjected to a total effective tax rate of 38,6%.

46.9 Deferred compensation arrangements are structured such that an employer will conclude an insurance policy over the life of the employee whereby the company receives the proceeds upon the policy’s maturity. As a separate contractual obligation, the employer invariably agrees to pay the proceeds received to the employee upon the fulfilment of certain conditions. Many of these policies are ceded by the employer to the employee which gives rise to income tax in the hands of the employee. The cession of such a policy by the employer to the employee results in the employee being regarded as the second owner of the policy and hence any further amounts received therefrom would also become liable to CGT. It is submitted that this also is highly inequitable even though in these circumstances the employee would have been liable to income tax on the value of the policy at the date it is ceded to him. This may affect many employees entitled to such benefits in the future.

46.10 f SARS wishes to subject the second hand owner to tax on the amount received from the policy, credit should at least be given for the tax that has other policies. Is this SARS’ intention? already been borne by the insurer.

46.11 At paragraph 43(c), no distinction is made between South African and

47. Disposal of small business assets
47.1 Paragraph 44 is discriminatory particularly in respect of professional practices where a number of partners get together to form the partnership and invariably the gross asset value of the partnership assets will exceed R5 million. Possibly the proposed legislation should provide for the apportionment of the gross asset value according to profit sharing percentage. This would avoid many unnecessary problems on the retirement of persons from professional styled partnerships. There appears to be a basis for apportionment in paragraph 44(2)(c) in regard to companies.

47.2 The holding of at least 10 per cent of the equity of a company qualifying as a small business may affect many professional practices which have been incorporated and due to the number of professional persons who are partners, each may hold less than 10 per cent. The 10 per cent factor appears to be an arbitrary factor and should be reconsidered.

47.3 Paragraph 44(1) refers to "gross asset value". It is submitted that this term should be defined in the Eighth Schedule or alternatively the terminology used in the provisions be consistent with those used elsewhere.

48. Prize money
Paragraph 46 excludes prize money from transactions conducted in terms of South African law or any disposition of a chance to win a prize from CGT. It refers to competitions etc organised in terms of South African law but the question that must be raised is the position of a South African resident who participates in, for example, the United Kingdom lottery or is successful at a casino located abroad. Is it is intended to subject such winnings to CGT or not? In the event that it is not, the paragraph needs to be amended accordingly and to refer to "equivalent foreign law".

49. Conversion of foreign currency
At paragraph 47, line 2, why is there a reference made to a "capital gain" and not to a capital loss as well?

50. Unit trust funds
50.1 From an examination of paragraph 49 it is clear that SARS has made a decision that the individual investors in unit trusts are required to disclose their transactions in unit trusts in determining capital gains tax due by them. This removes the burden that was going to be placed upon the unit trust industry in this country. It is for this reason that it is agreed that returns of proper information must be supplied by the industry to SARS so as to ensure proper compliance with the provisions of the Act. The paragraph refers only to:
"a unit portfolio contemplated in paragraph (e) of the definition of "company" as defined in Section 1".

50.2 The definition of company at paragraph (e) in section (1) of the principal Act provides as follows:

"any unit portfolio comprised in any trust scheme in securities other than property shares managed or carried on by any company registered as a management company under section 4 of the Unit Trust Control Act, 1981 (Act 54 of 1981); if - ...".

50.3 It is thus clear that the exclusion in this paragraph only applies to equity unit trusts and not property unit trusts.

50.4 It would appear that the property unit trust industry will be at a serious disadvantage insofar as equity unit trusts are concerned. This is so because the property unit trust industry will be liable to capital gains tax on the disposal of properties or shares held in property companies and at the same time the unit holders will be liable to capital gains tax on the sale of the units disposed of by them. This is effectively a double counting of the capital gains tax and should be addressed. It is inequitable, in our opinion, that the equity unit trust industry is dealt with advantageously vis-à-vis the property unit trust industry.

This is best illustrated by way of an example.

Equity Unit Trusts
Unit portfolio exempt from CGT on sale of equities.

Investor, a natural person, in unit trusts pays tax on capital gains realised on sale of units.

Natural person buys equity unit trust for R200 000 and disposes of same for R300 000

CGT is imposed at an effective rate of 10,5% of R100 000, i.e. R10 500.

Property Unit Trusts
Assume property unit trust sells a fixed property for R1 000 000 that cost R300 000. Taxable capital gain is R700 000.

CGT due is 15% thereof, namely R105 000

Company is liquidated and declares a dividend to property unit trust ("PUT").

CGT due by property unit trust is 16% of R595 000 (PUT is a trust) R95 200

Total CGT due on sale of property R200 200

Effective rate of CGT payable by PUT 28,6%

50.5 An investor is liable to CGT on gains realised on the sale of their units. Natural persons will pay CGT at an effective rate of 10,5% plus that already paid by the PUT.

50.6 The true effective rate of CGT is 36,1% (i.e. 100 – 28.6 = 71.4 x 10.5 = 7.5 + 28.6) for natural persons investing in PUT’s versus 10,5% for an investor in equity unit trusts.

50.7 It is must be noted that by far the larger proportion of units in the property unit trust industry are held by retirement funds for the benefit of pensioners etc. By not treating equity unit trusts and property unit trusts on the same footing, and in fact preferring equity unit trusts over property unit trusts, the draft Bill will result in distortions taking place between the two sectors. This intention cannot be supported and it is urged that SARS seriously consider treating both equity unit trusts and property unit trusts in the same way.

51. Donations to public benefit organisations
Paragraph 50 seeks to deal with the abovementioned matter and it is submitted that a donation to a charity that does not confer section 18A relief upon a taxpayer should not result in the individual being liable to capital gains tax. Donations made to such charities were always exempt from donations tax and it is unclear why capital gains tax should be payable in such circumstances. Donations made to charitable and ecclesiastical organisations which will generally not qualify for relief under section 18A of the principal Act but escape donations tax and estate duty. It would appear that it is intended that the value of such donations will be liable to capital gains tax. The rationale therefor must be questioned.

Part VIII: Roll-overs and attribution of capital gain
52. Paper gains on share disposals – roll-over
52.1 It is unfortunate that the roll-over rules contained in paragraph 52 do not contain relief for those circumstances where a shareholder receives shares in one company in exchange for another. The principal Act, at Section 24A, contains relief in certain circumstances where a dealer in shares receives shares in exchange for either fixed property and/or listed shares.

52.2 It is would appear that the United Kingdom and Australia contain rollover relief for share-for-share exchanges where the exchange is with a company with which the taxpayer is not connected in any way.

52.3 Where an investor holds shares in a listed company that is taken over by another group and receives shares in the new company, the capital gain realised therefrom should be deferred and rolled over until the new shares are finally liquidated.

52.4 The disposal of shareholding interests in return for strategic holdings in other groups is an inherent part of the growth and expansion methodologies of SA groups, both internally as well as those expanding internationally and it is for this reason that roll-over relief should be considered in these circumstances.

53. Re-investment in similar assets
At paragraph 53, the ‘roll-over’ relief on the disposal of manufacturing assets to buy new assets needs to be substantially extended. What is required is a total deferral of the gain until cash is eventually realised, not just a 5-year spread of the gain. At present, only forced disposals (e.g. insurance proceeds upon damage or destruction, expropriation, etc.) qualify for total relief. Also, the relief should be perpetual, i.e. should be rolled over each time a qualifying asset is sold and replaced, not just a once-off relief until the first replacement asset is disposed of. The failure to extend this relief will seriously inhibit growth since manufacturers will find it uneconomic to replace old assets with new ones.

54. Transfer of asset between spouses
Paragraph 54 should, in our view, be expanded upon to deal with the circumstances where assets are awarded pursuant to a settlement of divorce. The paragraph currently deals with the disposal of an asset by one spouse to another, but does not deal with the situation where assets are transferred by one spouse to another pursuant to a court order or agreement of divorce. It is submitted that paragraph 54 should be expanded upon to cater for this event.

55. Transfer of business to a company
At paragraph 55, the comments above in respect of paragraph 44 are equally applicable to this paragraph.

Part IX: Companies and shareholders
56. Definitions
56.1 At paragraph 60, some of the definitions are difficult to understand as presently worded and suggested wording is as follows:

56.1.1 " ‘pre-acquisition dividend’, in relation to any share acquired by a person
on or after the valuation date; or
before the valuation date in respect of which the time-apportionment base cost has been adopted in terms of paragraph 23,
means a dividend declared after the date of acquisition of that share, out of the profits or reserves derived prior to the date of acquisition by that person of that share by the company in which that share is held; "
alternatively
" ‘pre-acquisition dividend’, in relation to any share acquired by a person
on or after the valuation date; or
before the valuation date in respect of which the time-apportionment base cost has been adopted in terms of paragraph 23,
means a dividend declared after the date of acquisition of that share, out of the pre-acquisition profits or reserves of the company in which that share is; "

56.1.2 " ‘pre-valuation date dividend’, in relation to any share acquired by a person prior to the valuation date in respect of which the valuation basis has been adopted in terms of paragraph 23, means a dividend declared after the valuation date, out of the profits or reserves derived prior to the valuation date by the company in which that share is held; "
alternatively
" ‘pre-valuation date dividend’, in relation to any share acquired by a person prior to the valuation date in respect of which the valuation basis has been adopted in terms of paragraph 23, means a dividend declared after the valuation date, out of the pre-acquisition profits or reserves of the company in which that share is held; "
57. Dividend declared by non-listed company

57.1 At paragraph 61, in most cases where shares in non-listed companies have been held for considerable periods of time the necessary information to apply the provisions of this paragraph in regard to pre-acquisition dividends is most likely not available.

57.2 It is also suggested that this paragraph should contain a reference to paragraph 63.

57.3 The provisions of these paragraphs could become a massive administrative nightmare with the effluxion of time unless detailed records are maintained.

58. Reduction and redemption of share capital and share premium
58.1 The wording contained in paragraph 64, should be reviewed to ensure conformity with Sections 85 and 90 of the Companies Act, Act 71 of 1973, as amended which now refers to payments to shareholders and no longer to a reduction in share capital.

59. Dividend declared by listed company
59.1 At paragraph 62, the method of treating scrip dividends has not been addressed.

59.2 It is not clear as to what the position is where the effective interest in the listed company varies from time to time above and below a 10 per cent holding.

60. Liquidation or de-registration of companies
60.1 Paragraph 66(1)(a) refers to "the date of dissolution or deregistration of that company". In paragraph 66(1)(b) the Schedule seeks to specify the date on which a company will be regarded as having been wound up and it is submitted that the wording in paragraph 66(1)(a) should be expanded upon to specify how the date of dissolution or deregistration will be determined. Will it is be the date on which the company passes the requisite resolution under the provisions of the Companies Act or only once the Commissioner has agreed to the deregistration of the company? It is submitted that this issue should be clarified in the Schedule.

60.2 When one has regard to the provisions of paragraph 66 of the proposed Bill, it is clear that the tax is, what is referred to, a cascading tax. This means that the same underlying amount of capital gain can be subjected to CGT on more than one occasion. This is best illustrated by way of an example.

Example:
Assume Company A (Pty) Ltd owns 100% of the shares in Company B (Pty) Ltd which in turn owns 100% of Company C (Pty) Ltd.

Company C owns a fixed property that cost R200 000 and sells it is on capital account for R450 000. Company C declares the surplus to its shareholder as a dividend on deregistration. Company B in turn is deregistered and declares the amount received from Company C to Company A as a dividend.

The CGT due is as follows:

Company C
Net proceeds on sale of property R450 000
Less base cost R200 000
Taxable capital gain R250 000
CGT due at 15% (50% x 30%) R 37 500

Company B
Dividend received on C’s deregistration R212 500
(Assume base cost is a nominal amount of R1,00)
CGT due at 15% R 31 875

Company A
Dividend received on B’s deregistration R180 625
(assume base cost is a nominal amount of R1,00)
CGT due at 15% R 27 094

Summary
Company C’s taxable capital gain on sale of property R250 000

Total CGT due R 96 469

Effective rate of CGT 38,6%

In the event that company A declared the dividend to its shareholder, the effective rate of CGT, if a natural person amounts to 45,03% (i.e. R96 469 + [10,5% x (R180 625 – R27 094) / R250 000]).

60.3 Based on the above example, it is clear that the capital gain of R250 000 realised by Company C on the disposal of its fixed property, will ultimately attract CGT of R96 496, i.e. 38,6% as opposed to the nominal rate payable by companies of 15%. This would appear to be the firm intention of SARS, but it is unfortunate that this is the case and this approach cannot be supported in light of the example given above.

Part X: Trusts, trust beneficiaries and insolvent estates
61. Trustee assets treated as assets of beneficiaries with vested interests (paragraph 67) and interest in gains only (paragraph 68)

61.1 The provisions of paragraphs 67 and 68 need to be expanded to provide for the beneficiary to be entitled to recover from the trust assets any amount of tax that the beneficiary may be liable to pay in respect of the resulting taxation payable by the beneficiary as a result of the application of this paragraph. Failure to do so may result in the beneficiary being faced with a tax assessment without access to the assets giving rise thereto and therefore unable to settle the liability.

62. Distributions of other amounts
At paragraph 69(1)(b)(i), add at the end of the sub-paragraph the words "of the Act".

63. Insolvent estate of natural persons
Paragraph 70(b) is discriminatory and inequitable when compared with sub-paragraph (c). It could occur that due to the intransigence of a single aggrieved creditor the order of sequestration may not be able to be set aside. It is suggested that the provisions of sub-paragraph (c) should apply to the person whether or not the order of sequestration has been set aside.

Part XI: Anti-avoidance measures
64. Value shifting
We are unable to comment on paragraph 71 by virtue of the fact that the draft Bill, as made available to us, contains no wording in this regard.

Part XII: Miscellaneous
65. Transactions during transitional period
At paragraph 72(3)(b) refers to a base cost equal to the base cost of that asset or the substantially similar asset in the hands of the person who disposed of it. This paragraph should be expanded upon to provide for the ability to obtain a valuation as at valuation date just as the person who disposed of the asset could have obtained.

OTHER FISCAL STATUTES
66. Transfer Duty Act: Section 9 – transfer duty on transfer of primary residence
66.1 Sub-paragraph 16(a)
Provision is made for acquisitions, which take place during the year ending 31 March 2002. This period may not be sufficient for the education of taxpayers and the implementation of the provisions of the Section. Provision should be made for the Commissioner to extend the period.

66.2 Sub-paragraph 16(b)
This sub-paragraph should be deleted and sub-paragraph (c) should be relied upon as the qualifying requirement. The direct ownership of the equity share capital or members’ interest as from 1 April 2001 to date of acquisition should not be a requirement. Sub-paragraph (b) could exclude taxpayers whose primary residences are held by companies the total equity share holding being held by another company which is in turn wholly owned by the individuals who reside in the residence.

66.3 It is considered to be inequitable and unreasonable that the provisions of Section 9 of the Transfer Duty Act and paragraph 35 of the Eighth Schedule only apply to company or close corporation held primary residences and not to apply to such primary residences held by trusts.

67. Estate Duty Act: First Schedule to the Estate Duty Act
It is noted that it is intended to amend the rate of estate duty and it is not possible to properly comment on the proposed amendments without being aware of the extent of the amendment in the rate of estate duty.

68. Taxation Laws Amendment Act, 1994: Section 39
68.1 The proposal to reduce the threshold from R75million to R50million must be supported but it is unfortunate that a threshold is to be retained in the amended legislation. It will be far preferable if the concession could apply to all categories of groups as defined without having regard to any monetary limit. The sooner the ultimate objective of removing the monetary limit is attained, the better.

68.2 The insertion of sub-section 6(bA) refers to "base cost". This is a term not defined in the Taxation Laws Amendment Act 1994 nor in the Income Tax Act but is only defined in the Eighth Schedule to the Income Tax Act. Reference to the definition is required to be incorporated into the new sub-section.

69. GENERAL
69.1 Asset disposals between group companies
The disposal of assets between group companies should be on a no-gain no-loss basis, since there really is no gain or loss to the group. And this is supported by the fact that, for years now, SA has already had rules which deem transferred assets to have the same value for the purposes of capital allowance claims.

69.2 Gains of controlled foreign entities (CFE’s )
The fact that gains of CFEs are included is harsher than in the UK. Exclusion similar to the UK should be considered. The absence of such relief will inhibit international growth of many SA multinationals.

69.3 The retirement fund industry
The decision to exclude the retirement fund industry from CGT at this time must be welcomed and supported. SARS is urged to finalise the treatment of the retirement fund industry so as to bring certainty to taxpayers in this country. There are a host of issues that remain to be settled in this regard and the sooner this is done, the better for the economy of the country.

69.4 Exchange control restrictions
We are of the opinion that the Eighth Schedule should allow for a postponement of payment of the CGT or the recognition of the gain in those cases where a South African resident realises a capital gain in an overseas country that has exchange control restrictions in force. Where the proceeds realised cannot be remitted to South Africa in terms of the foreign country’s exchange control restrictions, taxation of the gain should be postponed until the proceeds thereof can be freely remitted to South Africa. Similar provisions have been introduced in the rules pertaining to controlled foreign entities dealt with in section 9D of the principal Act.

69.5 Indexation
69.5.1 It is unfortunate that the decision has been taken thus far not to allow for the indexation of capital gains. This means, in effect, that taxpayers will be subjected to tax on inflationary gains. It is noted that the United Kingdom no longer allows for indexation and that Australia more recently also did away with it. Those countries’ inflation rates are lower than ours and this is a factor in the equation. However, certain other concessions are available in those countries to compensate for the lack of indexation.

69.5.2 According to the South African Reserve Bank’s statement of the Monetary Policy Committee of 16 November 2000, the consumer prices excluding mortgage costs on capital (that is CPIX) amounted to 8,1% in September 2000. The Treasury is now engaged in inflation targeting and has indicated that CPIX will range from 3% to 6% for the 2001 and 2002 years. The lack of indexation is best illustrated by way of an example.

CPIX (inflation rate)
September 2000 - actual rate 8,1%
2001 estimate 3% - 6%, say actual rate 4,5%
2002 estimate 3% - 6%, say actual rate 4,5%

Assume shares acquired on 1 April 2001 for R100 000 and sold on 30 September 2003 for R130 000.

Calculate the CGT due and true economic gain.
CGT due:-
Proceeds R130 000
Cost R100 000
Taxable capital gain R 30 000
CGT due thereon, say 10,5% R 3 150 (A)

Capital gain attributable to inflation
Cost R100 000
Inflation year 1, say 8,1% R 8 100
Inflation year 2, say 4,5% R 4 864
Inflation year 3, say 4,5% R 5 083
Cost adjusted for inflation R118 047

Economic gain
Proceeds R130 000
Less inflation adjusted cost R118 047
Economic capital gain R 11 953
CGT on above at 42% R 5 020 (B)
CGT saving attributable to an
inclusion rate of 25% (B - A) R 1 870

69.5.3 Where assets are held for a relatively short period of time, it would appear that the 25% inclusion rate, applicable to natural persons, compensates for the lack of indexation. In the case of companies and trusts the inclusion rate is 50%. If the seller in the above example is assumed to be a company, the CGT due would amount to R4 500, i.e. R520 less than if 100% of the gain is included with an indexation allowance for inflation. Clearly, the 50% inclusion rate compensates the company sufficiently for inflation where the asset is held for a relatively short period of time and the rate of inflation is low.

69.5.4 In the event that assets are held, say, for 10 years it is our view that the 25% inclusion rate does not compensate for inflation. This is best illustrated by way of an example:

Example:
Fixed property acquired on 1 April 2001 for R200 000 and sold on 1 April 2011 for R400 000.
Calculate the CGT due and true economic gain.
CGT due:-
Proceeds R400 000
Cost R200 000
Taxable capital gain R200 000
CGT due thereon, say 10,5% R 21 000 (A)

Capital gain attributable to inflation
Cost R200 000
Inflation year 1, say 8,1% R 16 200
Inflation year 2, say 4,5% R 9 729
Inflation year 3, say 4,5% R 10 166
Inflation year 4, say 6% R 14 166
Inflation year 5, say 6% R 15 016
Inflation year 6, say 6% R 15 916
Inflation year 7, say 6% R 16 872
Inflation year 8, say 6% R 17 883
Inflation year 9, say 6% R 18 957
Inflation year 10, say 6% R 20 094
Cost adjusted for inflation R354 999

Economic gain
Proceeds R400 000
Less inflation adjusted cost R354 999
Economic capital gain R 45 001
CGT on above at 42% R 18 900 (B)
CGT attributable to inflation (A – B) R 2 100

If the rate of CPIX is relatively low, it would appear that the 25% inclusion rate will compensate for inflation. Where the rate of inflation is 6% or more, it is clear that the 25% inclusion rate does not compensate sufficiently for inflation.

It must be noted that the inclusion rate for trusts and companies is 50%. We submit that all taxpayers should be subject to an inclusion rate of 25%.

If one assumes that the fixed property in the above example was sold by a company, the CGT due, ignoring indexation, would amount to R30 000. If the cost was adjusted for inflation, the CGT due would amount to R13 500. The CGT is over-stated by R16 500 (i.e. R30 000 – R13 500). It is clear that the 50% inclusion rate does not compensate companies and trusts for the effects of inflation over a longer period of time.

It is for the above reasons that we cannot accept the decision not to index capital gains in the calculation of CGT.

69.6 Estate duty and donations tax
By virtue of the impending introduction of CGT, it is submitted that a proper review of the donations tax and estate duty provisions must be undertaken so as to prevent any "double counting" that may arise in respect of similar events and also on the same values. It is noted that it is intended to adjust the rates of donations tax and estate duty and this may yield some relief preventing the concerns that the same assets will be subject to one or more form of taxation. It is timeous though to review the provisions dealing with donations tax and estate duty in view of the impending introduction of CGT.

69.7 Diplomatic and Consular Missions
The guide on CGT published by SARS on 23 February 2000 made reference to the fact that fixed property disposed of by diplomatic and consular missions would be excluded in the determination of CGT. We have not had sight of any paragraph in the Eighth Schedule dealing with this particular item and this may want further consideration.

We once again wish to express our appreciation in being afforded an opportunity to address the Committee on this important Bill.
Should you require any further information, please do not hesitate to contact Mr L R Norval.