To understand capital gains, there are a couple of fundamentals that you have to understand, and that is the topic of the next three articles.
There are a couple of fundamentals you have to grasp, and if you have them, capital receipts and capital gains become almost - and I say almost - a walk in the park.
Taxpayers and the SA Revenue Service (Sars) are like an old married couple, and you will get two very different answers, depending on who you ask, "Whose money is it?"
I think the correct response to that is always, "Yours, dear!"
Let’s clarify what is of a “capital nature” so we can get you out of the dreaded definition of gross income.
Tax planning and arbitrage have been around as long as there have been tax collectors, currency and Moulin Rouge. The result is, was and will be arguments between taxpayers and their draconian Sars spouse as to what the income really is.
The resultant court cases provided clarity. The clarity came from the respected and revered wisdom of our South African judicial system, a system that we can be proud of and that, above all, can, must and should be trusted.
The money you receive that is of a capital nature applies to calculating taxable capital gains. This will require getting out of the starting gate. If a racehorse owner purchases a horse (Silver Coin), then the racehorse is an asset. The horse will run and win a race. Silver Coin will, therefore, generate gross income for the horse owner. The horse is, of course, a capital asset that produces the income. People may now find it hard to distinguish between the head or the tail of Silver Coin.
In the case of a wine farmer, the land and the vineyards are the capital assets, the grapes that are turned into wine are the product, or the fruits of the tree (vine, technically). The sales of the wine are gross income and, therefore, taxable.
However, if the vineyard is sold, then the sale of the vineyard would be capital in nature (there are a plethora of other factors to consider).
If the farmer is fed up and wants to retire or avoid expropriation, then the money he receives from the sale of the vineyard is of a capital nature. That will be subject to capital gains tax and taxed at a lower rate.
Back to Silver Coin and Mayfair. If the Mayfair were to speculate or trade, say sell 25 horses, with the intention to make a profit from the sale of the horses, well then there might be a case to be made that the proceeds on the sale of the horses are not capital in nature, but just good old gross income.
We strive all our lives to accumulate wealth (assets) that will appreciate over time, and when we retire, we can turn these assets into money and provide for our old age.
It is only when you sell these assets that you accumulated that the money you receive on the sale of the assets will be taxed in terms of the eighth schedule to the Income Tax Act - the dreaded capital gains tax schedule.
May your coins be gold and not silver. May fair winds not turn to huffs and puffs that see your assets disappear. May you get Meerlust for the Rubicon.
Willem Oberholzer CA (SA), MCom Tax, is executive director at Probity Advisory (Kreston South Africa).
- PERSONAL FINANCE