This article was first published in the first-quarter 2013 edition of Personal Finance magazine.
The taxation of the proceeds of the sale of Krugerrands is not covered by any specific tax legislation. Proceeds are definitely taxable, but whether as capital gain (with 33.3 percent of the gain included in taxable income) or as fully taxable profit revenue depends on the facts and circumstances of the purchase and sale and the taxpayer’s intention.
The three-year deemed capital rule (in section 9C of the Income Tax Act) applies to shares but does not extend to Krugerrands. In terms of that rule, the sales proceeds of shares held for more than three years are taxed as capital.
The distinction between capital gains and revenue profits is based on case law developed from court judgments. The taxpayer’s intention in acquiring the asset is a key factor. The main test is whether the asset was purchased as a long-term investment or whether it was acquired to sell on at a profit. The latter would be regarded as a profit-making scheme, with profits taxable as revenue.
The typical indicator for fixed-capital assets is that they are held for a lengthy period in order to generate a stream of income, such as rental from property, dividends from shares, or interest from bonds. In other words, an element of permanency applies to capital assets, whereas frequent purchases and sales are indicative of profit-making, so the proceeds are regarded as revenue. However, although a lengthy holding period is supportive of a capital intention, it is not conclusive.
The fact that Krugerrands do not produce an income return suggests that they are generally acquired with the intention of being sold on at a profit, indicating taxation as revenue rather than capital. Certainly, regular purchases and sales with short holding periods place the proceeds squarely into the revenue category.
At the other end of the spectrum, SARS’s Comprehensive Guide to Capital Gains Tax (Issue 4), available on the SARS website www.sars.gov.za, indicates that capital treatment is obtainable where coins are held as part of a collection, or where the intention is to hold them indefinitely – for example, to bequeath them on death.
However, in the past, taxpayers have made a successful case for their profits being treated as capital gains on slightly wider grounds. Successful taxpayers were able to show that they acquired the Krugerrands as a “store of wealth”, or as an investment that would retain its value and be
easily transportable. In these cases, the Krugerrands were held for relatively long periods (in one case, 13 years).
The reason for the sale was also important. The successful taxpayers disinvested because they needed the funds for necessary expenditures, such as repaying loans, paying university fees or carrying out necessary maintenance or improvements to the family home.
Given the economic uncertainties of the past few years, investors may have invested in Krugerrands as a mechanism to preserve their capital, in the hope that this asset class would retain its value when other investment categories looked too volatile.
If the following factors apply, the taxpayer may be able to overcome the inference that the Krugerrands were purchased with profit-making intent:
* The taxpayer has no history of dealing in Krugerrands;
* The clear intention of purchasing the Krugerrands was capital preservation rather than speculation;
* There was a lengthy holding period; and
* An intervening factor gave rise to the sale.
The outcome of any particular case will depend very much on the exact circumstances of the purchase and sale.
* Kari Lagler qualified as a chartered accountant and is a registered tax practitioner and independent tax consultant. Her experience includes eight years with Old Mutual.