Many small companies are run by entrepreneurs who need to choose out of the business when they retire or when their well being fails them – and the Income Tax Act provides some relief from capital gains tax for these small companies.
The enterprise could qualify for a R1.8 million exclusion on capital gains tax, though there are a number of provisions and concerns to qualify for the exclusion.
It is a “fantastic” exclusion, however it doesn’t get the eye it ought to, Carmen Westermeyer, tax associate at Maitland & Associates mentioned throughout the month-to-month Tax Café dialogue hosted by The Tax Faculty.
Core necessities
It solely applies to lively business property; the asset should be used solely for commerce functions; if the entrepreneur is a member of a closed company or a shareholder in a business, they need to maintain 10% of the asset; and the asset will need to have been held for not less than 5 years previous to disposal.
“This is where a lot of people trip up, either because they don’t meet the five-year requirement because they have just started the business or they have changed the format of the business,” says Westermeyer.
The sale should be a ‘wholesale sale’ because the full capital achieve should be recognised inside 24 months of the date of first disposal. In its Comprehensive Guide to Capital Gains Tax, the South African Revenue Service (Sars) says using the phrase ‘entire’ signifies that all of the shares held should be disposed of throughout a 12 months of evaluation.
“If a person held 10% of the shares and sold 5% in the first year of assessment and the remaining 5% in the second year of assessment, the transaction would not qualify.”
Sars says it is because the particular person wouldn’t have disposed of the ‘entire interest’ on the finish of 12 months one. There can be no approach of understanding whether or not the complete curiosity will the truth is be disposed of in 12 months two and the evaluation can’t be held open till the tip of 12 months two. “Tax is an annual event and there needs to be finality in the raising of assessments,” says Sars.
Market worth
Another consideration is that the market worth of the overall business, and never simply the person’s share, should be lower than R10 million.
Westermeyer additionally factors out that whereas the exclusion will be utilized for a number of companies, the R1.8 million exclusion is over a lifetime and never per business.
“Realistically you need to look at your stake, how long you have held it, and how many businesses you own. What often happens is that people either do not have a large enough stake [10% threshold] of they have stakes in too many businesses,” she says.
Westermeyer explains that if somebody has a 10% stake in a business that’s price R20 million, their share will probably be far lower than R10 million – however the exclusion solely applies when the overall worth of the corporate is taken under consideration.
“We can argue that that is unfair but it is what it is,” she provides.
Read: Tax compliance efforts yield billions for the fiscus
Business functions
Sars explains that the concession applies to the extent that immovable property is used for business functions. It is not going to apply to the a part of the immovable property used for non-business functions, and an apportionment will probably be required.
“It follows that the presence of a farmhouse on a farm will not debar the farmer from claiming the exclusion in respect of the rest of the farm,” Sars explains.
An individual who operates a store on the bottom flooring of a double-storey constructing and lives on the primary flooring will probably be entitled to the exclusion in respect of the achieve attributable to the world used for the store.
However, not all small business property will qualify for the exemption.
Financial devices resembling loans, advances, debt, debentures, shares, financial institution deposits, participatory investments in collective funding schemes, futures, choices, ahead alternate contracts, index-linked investments and cryptocurrencies are excluded.
Furthermore, the exclusion of property producing rental earnings applies to each movable and immovable property. It would apply equally to a block of flats occupied by tenants or a fleet of automobiles forming a part of a car-hire business, Sars explains.
