Calculation of Taxable Capital Gains and Assessed Capital Losses
1. Where are taxable capital gains included in the basic reduction formula?
A taxable capital gain is included directly in taxable income by section 26A
2. In the case of a couple married in community of property, will a capital gain on an investment in the name of one of the partners be regarded as a capital gain accruing to both partners? In other words, can the capital gain be spread between the two partners as is the case with interest earned? If the answer is "no", should investments which are likely to incur a capital gain when disposed of (e.g. shares or unit trusts) not be transferred to the partner who has the lower marginal tax rate?
Under paragraph 14 of the Eighth Schedule a disposal of an asset by a spouse married in community of property is treated as having been made –
- in equal shares if the asset forms part of the joint estate; and
- solely by the spouse making the disposal if the asset does not form part of the joint estate.
Thus if the capital gain or loss forms part of the joint estate it must be split equally between the spouses. But if it is excluded from the joint estate it must be recognised only by the spouse making the disposal.
A spouse in this situation, or perhaps a spouse married out of community of property, may well be tempted to transfer the asset to the partner with the lowest marginal tax rate in order to take advantage of that rate. However, paragraph 68 of the Eighth Schedule permits SARS to disregard that transfer if the main purpose is to reduce, postpone or avoid the payment of tax and to attribute the gain back to the partner that originally owned the asset.
3. Can an assessed loss – as opposed to an assessed capital loss - be set off against a taxable capital gain?
Yes. Some commentators have questioned this point because a taxable capital gain is included in taxable income. The definition of the term “taxable income” in section 1 provides as follows:
“taxable income” means the aggregate of—
(a) the amount remaining after deducting from the income of any person all the amounts allowed under Part I of Chapter II to be deducted from or set off against such income; and
(b) all amounts to be included or deemed to be included in the taxable income of any person in terms of this Act;
It is evident from this definition that taxable income can be a negative figure. Paragraph (a) would become negative when the amounts allowed under Part I of Chapter II exceed the income of a person. Furthermore, Part I of Chapter II includes section 20 which deals with assessed losses.
The intention of the legislature can also be seen from the amendments to section 103(2) which provides that a ‘tainted’ capital gain cannot be set off against an assessed loss. These amendments would not have been necessary if a taxable capital gain could not be set off against an assessed loss.