Understanding the tax implications of your assets
In this article, let’s unpack what assets are - a mundane statement to some, but an eye-opener to others.
Accountants will tell you that an asset is “a present economic resource controlled by the entity as a result of past events, and that an economic resource is a right that has the potential to produce economic benefits”. This is according to the International Accounting Standards Board’s revised Conceptual Framework for Financial Reporting.
What do they mean by an “economic resource”, “past events” and “a right to produce potential economic benefits”? How do you determine the present value of a potential economic benefit?
In these uncertain times, let’s see how many of these fair-value assets will stand the test of time, and how many will dissipate like mist before the rising Covid-19 sun and what could be the most significant global depression and man-made catastrophe in history.
The Eighth Schedule to the Income Tax Act may shed more guidance on what an asset is.
An asset is defined as property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any currency, but including any coin made mainly from gold or platinum; and a right or interest of whatever nature to or in such property.
An asset on your balance sheet is, therefore, property (an asset) that you own, or any right thereto - for example, the right to use or the right to occupy. The asset can be moveable, such as a car, jewellery, or art; or it can be immovable, such as a piece of land or a house.
What is interesting is that an asset can also be tangible or intangible (that is, corporeal or incorporeal). What does this mean? Your house is physical, and a dematerialised share is incorporeal. If you have a business and you have many clients, your client list is an asset in your company, but it is not on your balance sheet. Why? Because it was internally generated (self-made), and it is hard to value. But a willing buyer may want to buy the right to service those clients, and hence the list has value.
Goodwill is a form of client value, the inherent value of your company. You won’t find it on your balance sheet, and you can’t use it to borrow money, but you can sell it. That’s strange, I know.
So you have to draw up a list of all your assets, the assets that you can see and touch, and those you can’t see and touch.
You have to place a value on your intangible assets. The name of your company (your brand) and your client book are assets. Yes, it may have a value. If you have designs and patents and software scripts, they may have a value, but they may not be on your balance sheet.
List them and have them valued. That is the take-home message from “you have to determine accurately what the current market value for your assets are, both tangible and intangible”.
Bear in mind that your assets grow in value, and when you dispose of them you have to render unto Caesar what is due to Caesar. You have to pay the taxman the gains you have made on the appreciation of your assets on the date that you sell them.
If your company is suffering and you can’t see the light at the end of the tunnel, list your assets, both those you can touch and those you have worked hard to create, and sit down with qualified people. I would imagine that a chartered accountant would fall into that category. Seek sound, balanced expert advice on what you can do with your assets. Maximise your balance sheet to weather the storms that we are facing - don’t give up.
And if you have many assets, and they have grown over the years, now might be an opportune time to restructure your affairs. How did the courts put it? It is the right of every man to plan his tax affairs to pay as little tax as is necessary. Plan your estate duty to pay the correct amount of tax.
Planning is not stealing. Being intelligent is not a sin, and planning appropriately for your old age and the prosperity of your family is definitely not unpatriotic.
Willem Oberholzer CA(SA), MCom (Tax) is the executive director at Probity Advisory (Kreston South Africa).