OPINION: The ‘Yellow Submarine’of Taxes
Your palms get sweaty, your heart is racing, you're winning! So what? What now? The money you received for your cold coin is of a capital nature. So now what do you do?
Well, here is how to demystify how capital receipts get whisked into a capital gain that is sprinkled with a couple of sections and becomes a net taxable capital gain. And that gain is standing there like a steaming hot muffin. Hot muffin, or a hot steaming pile of Silver Coin dung?
Capital proceeds, or the money you received from the sale of your assets (capital assets), are what is referred to in the 8th schedule as proceeds. Proceeds are reduced by the base cost of the asset that was disposed of. What makes capital gains tricky is this: proceeds, base cost, assets and disposal are all defined words that have a meaning much broader than you might think.
Please, you have to seek advice on these matters, be it from the SA Revenue Service (yes you can ask them), or from your tax practitioner, accountant or local chartered accountant on the corner.
But let's grasp the essence.
The money you receive from the sale of an asset is the proceeds. The proceeds are reduced (minus) by what you first paid for the asset (purchase cost). This gives you the capital gain, or merely the profit you made when you sold the asset.
The capital gain or profit is then multiplied with the inclusion rate that is 40percent for individuals and 80percent for companies and trusts.
The above answer will then, after annual allowances are applied, be included in your taxable income (no, not gross income), that will then be subjected to tax at your applicable tax rate or 28percent for a company or 45percent for a trust.
There are inclusions, exclusions, limitations and deductions, etc, that are applied to get to an end result. Some of these deductions are, for instance, that the first R2500000 of capital profit on the sale of your primary residence will be exempt from capital gains tax.
Remember the tax planning bookshelf you built, that came tumbling down when you put the first book on it? Well, the same thing applies here. If you don't read the fine print, and your carefully constructed tax planning bookshelf falls over with the first assessment you put on it, then be it on your head - if you did not seek advice. Here is what it all means. You work to earn a living and you pay tax on what you earn (45percent). You spend your earnings on living expenses that are subject to VAT (15percent) and you purchase assets that are also either subject to VAT or transfer duty (8percent).
Now, when you sell your assets that you worked so hard to buy with your after-tax money and after-VAT money, that amount of profit (if it is not your primary residence) will then be subject to a further 16percent to 18percent capital gains tax. Depressing, when you think of it. And to think we have the Beatles to thank for capital gains tax. I wish the yellow submarine was scuttled and thanks to Penny Lane you can't buy me love, yeah, yeah, yeah.
Willem Oberholzer is a director and tax adviser of Probitory Advisory.