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FAQs: Base Cost
If your CGT question is not dealt with in this list of FAQ's, please address your query to cgt@sars.gov.za
1. What is base cost?
Base cost means the cost of an asset against which any proceeds upon disposal are compared in order to determine whether a capital gain or loss has been realised.
Base cost includes those costs actually incurred in acquiring, enhancing or disposing of a capital asset that are not allowable as a deduction from income.
The following are included in the base cost of an asset:
- Acquisition cost
Those costs actually incurred in acquiring an asset. If the asset is one that you created yourself, for example, the goodwill of a business, any capital expenditure actually incurred in creating the asset may form part of the base cost, to the extent that the expenditure has not been claimed for normal income tax purposes.
- Incidental costs of acquisition and disposal
Any of the following costs actually incurred as expenditure directly related to the acquisition or disposal of an asset:
- The remuneration of a surveyor, auctioneer, accountant, broker, agent, consultant or legal advisor, for services rendered
- Transfer costs
- Stamp duty or similar duty
- Advertising costs to find a seller or to find a buyer
- Any amount of VAT not allowed as an input deduction or where an equivalent tax is levied by a foreign state, not allowed as an input deduction by that state.
- The cost of moving that asset from one location to another
- If that asset was acquired or disposed of by the exercise of an option, any consideration given by that person for the granting of that option.
- The cost of installation of the asset.
- Donations tax paid in certain circumstances.
- Capital costs of maintaining title or right to an asset
These costs would include, for instance, legal costs actually incurred in respect of a court dispute relating to maintaining your right or title to an asset you own.
- Cost of improvements or enhancements
The improvement or enhancement must still be reflected in the asset’s state or nature at the time of its disposal.
Valuation date value of an option
Cost of ownership of assets used exclusively for business purposes, listed shares and units in a unit trust scheme
- These cost would include the cost of maintaining, repairing and protecting the asset, rates and taxes and interest. In the case of shares and units only one third of the expenditure is allowed.
Certain amounts that have been included in the person's income and amounts arising as a result of value shifting arrangements.
And what about current costs such as interest, repairs, insurance and rates and taxes? They are normally allowed as deductions from income or are incurred for personal use and are not allowed as part of base cost.
2. What if an asset was acquired before the valuation date?
Where an asset was acquired before the valuation date and disposed of thereafter, CGT will only be payable on the capital gain attributable to the period after the valuation date. In other words, any gain attributable to the pre-valuation date period is not subject to CGT. The gain attributable to the period of ownership of an asset before the valuation date is excluded from CGT by valuing the asset on valuation date or by adopting time-apportionment base cost
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3. I hold units in a unit trust through a management company that charges me a monthly fee. Is this fee deductible from any capital gain that I may make?
No, this is a current expense that does not enhance the value of the assets concerned.
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4. I hold units that are held in income and gilt unit trusts. These pay interest (on which income tax is paid), and which is reinvested. On selling these units will I have to pay CGT on the difference between the original capital amount and the redeemed amount bearing in mind that this increased amount will include the reinvested interest amount on which income tax has already been paid?
No, income reinvested in the unit trusts will be utilised to purchase additional units, which will have their own base costs. As an example, assume that you hold 100 000 units with a total base cost of R50 000 and interest of R5 000 is reinvested to purchase an additional 800 units. The total base cost will increase to R55 000 and, if the 10 800 units are sold for R75 000, the capital gain will be R20 000, not R25 000.
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5. If an investor were to add monthly to an existing unit trust fund for a couple of years after 1 October and then sell all the units how would the loss/gain be calculated?
Two features of the legislation reduce the record keeping required of a monthly investor in a unit trust.
The weighted average cost method is one of three asset identification methods for determining the base cost of identical assets such as unit trusts. The other methods permitted are specific identification and first in first out.
In essence, the method involves keeping running totals of the number of units bought and sold in a particular fund. It is best explained by way of an example.
Example:
Units in a unit trust are purchased on dates indicated.
|
Date |
No. of units |
Cost per Unit |
Cost |
|
1 October 2001
1 November 2001
1 December 2001
1 January 2002
Balance |
100
50
150
100
400 |
15.00
16.00
17.00
13.50 |
1 500
800
2 550
1 350
6 200 |
On 28 February 2002 125 units are sold for R2 125.00.
The weighted average unit cost is R6 200 / 400 = 15.50
The base cost of 125 units is therefore 125 x R15.50 = R1 937.50.
The capital gain is R2 125.00 – R1 937.50 = R187.50
|
Date |
No. of units |
Cost per Unit |
Cost |
|
Balance
28 February 2002
Balance
|
400
-125
275 |
15.50
15.50
|
6 200.00
-1 937.50
4 262.50 |
If an additional 100 units are brought for R18.00 each on 1 April 2002, the weighted average cost may be calculated as follow:
|
Date |
No. of units |
Cost per Unit |
Cost |
|
Balance
1 April 2002
|
275
100
375 |
18.00
|
4 262.50
1 800.00
6 062.50
|
The weighted average unit cost is R6062 / 375 = R16.67
Where persons have acquired units before and after valuation date, the opening entry on 1 October 2001 in any such calculation would be the number of shares owned on that date and the market value of the shares on that date. Thereafter purchases and sales could be recorded in the normal way.
Unit trust management company reporting
In order to simplify matters still further, management companies have given the responsibilities of providing returns of the sale of units by investors. These returns will be similar to the annual returns of interest earned that are already prepared by the management companies and will disclose the:
Number of units disposed of by the unit holder;
Cost of those units determined on the weighted average basis;
Proceeds on disposal of those units; and
Gain derived from, or loss incurred in respect of, the disposal of those units.
Unit holders who do not wish to use the weighted average cost method to determine capital gains on the disposal of their units are not bound by this return. However, they will have to keep the records necessary to support the alternative they select.
Unit holders who adopt the weighted average method are obliged to adopt the method for all their units in the various unit trusts in which they have an interest. For example if a unit holder holds units in three different unit trusts and adopts weighted average for one of them, he or she will also have to use the method for the other two.
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6. I bought shares in 1999 for R100 each. The average price at the starting date for CGT (1 October 2001) is R60. I then sell these shares at a date after 1 October 2001 for R70. Am I now liable for CGT on the R10 being the difference between the realised price and the valuation date value when in fact I made an actual loss of R30 per share? (Updated 16 January 2002)
No. Paragraph 27(3)(a) of the Eighth Schedule provides that if you adopted a specific identification or FIFO basis of valuation of your shares, your valuation date value will be restated to R70 under these circumstances. There will, therefore, be no capital gain or loss on this transaction. A similar principle applies where an asset is sold for less than its valuation date market value but more than its historical acquisition cost. However, where you adopt the weighted average identification method, the market value gain of R10 (R70 - R60) will be brought to account. The reason is that this method uses the market value of your shares on 1 October 2001 as its starting point. The gain and loss limitation rules are not applicable if you adopt this method.
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7. Do paragraphs 26 and 27 apply to listed shares?
Paragraphs 26 and 27 apply to SA listed shares and SA unit trusts. These rules do not apply to
- foreign listed shares and unit trusts where you have not determined a market value in respect of those assets (i.e. where you have not completed a valuation form in respect of those assets by 30 September 2004), or
- where you adopt the weighted average method for determining the base cost of your shares or unit trusts.
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8. Can interest incurred in respect of the acquisition of shares in a private company be added to base cost?
No – this is specifically prohibited by para 20(2)(a) of the Eighth Schedule. In the case of listed shares and unit trusts, however, para 20(1)(g) allows one-third of the interest incurred to be added to base cost.
SCENARIO 1: An individual acquired a property 16 years prior to the effective date of CGT for R250 000. The taxpayer added a set of storerooms for R60 000 two years before the effective date and built a new wing for R300 000, a year after the effective date. The taxpayer sells the office block for R2 000 000, two years after the effective date.
SCENARIO 2: The same facts but the cost was all incurred in one year prior to the effective date. Why is it that if you incurred it over a period your gain is higher than if you incurred it once?
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9. Is it possible that you could clarify the following solution for me, It is concerning para 30 TAB. The question is as follows:
SCENARIO 1: An individual acquired a property 16 years prior to the effective date of CGT for R250 000. The taxpayer added a set of storerooms for R60 000 two years before the effective date and built a new wing for R300 000, a year after the effective date. The taxpayer sells the office block for R2 000 000, two years after the effective date.
SCENARIO 2: The same facts but the cost was all incurred in one year prior to the effective date. Why is it that if you incurred it over a period your gain is higher than if you incurred it once?
SCENARIO 1: Expenditure incurred pre- and post- valuation date
Pre-valuation date expenditure is R250 000 + R60 000 = R310 000
Post-valuation date expenditure = R300 000
Total expenditure = R610 000
Proceeds R2 000 000
Period property held before valuation date = 16years. Period held after valuation date = 2years.
Total = 18 years.
Pre-valuation date proceeds = Proceeds x pre-valuation date expenditure
Total expend
= R2 000 000 x R310 000
R610 000
= R1 016 393
Gain produced by pre-valuation date expenditure =R1 016 393 - R310 000 = R706 393
Portion of capital gain attributable to period prior to valuation date = R706 393 x 16 years
18 years
= R627 905
Valuation date value = R310 000(pre-valuation date expenditure) R627 905 = R937 905
Total base cost = R937 905 R300 000 = R1 237 905
Capital gain = proceeds - base cost
= R2 000 000 - RR1 237 905
= R762 095
SCENARIO 2 : Expenditure all incurred in the year of purchase prior to CGT
Proceeds are all attributable to pre-valuation date expenditure = R2 000 000
Total costs = R610 000
Gain = R1 390 000
Time apportionment base costR1 3900 000 x 16/18years = R1 235 556
Base cost = R610 000 R1 235 556 = R1 845 556
Capital gain =R2 000 000 - R1845 556 = R154 444
It is not the fact that you incurred the costs over a period rather than all at once that necessarily affects the result. The gain in scenario 1 is higher than in scenario 2 because nearly half the costs were incurred after valuation date and thus generated nearly half of the post CGT gain.
In scenario 2 all these post-valuation date costs are thrown back 16 years to the date of acquisition prior to the valuation date with the result that 16/18 of the gain is attributable to the pre-valuation date period.
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