Disposal of small business assets on retirement
Two definitions are discussed below:
‘Active business asset’ means—
(a) an asset which constitutes immovable property, to the extent that it is used for business purposes; or
(b) an asset (other than immovable property) used or held wholly and exclusively for business purposes,
(i) a financial instrument; and
(ii) an asset held in the course of carrying on a business mainly to derive any income in the form of an annuity, rental income, a foreign exchange gain or royalty or any income of a similar nature.
The exclusion of capital gains applies to the extent that immovable property is used for business purposes. This means that the exclusion will not apply to the part of the immovable property used for non-business purposes, and an apportionment will 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. A person who operates a shop on the ground floor of a double storey building and lives on the first floor will be entitled to the exclusion in respect of the gain attributable to the area used for the shop.
The intention is to exclude assets generating passive income and to rather target active business assets.
The following definitions are relevant:
- A ”financial instrument” is defined as including inter alia loans, options, forward exchange contracts, shares, participatory interests in collective investment schemes, index linked investments and bank deposits.
- “Small business” means a business of which the market value of all its assets, as at the date of the disposal of the asset or interest contemplated in paragraph 57(2) of the Eighth Schedule does not exceed R10 million.
In determining whether a business qualifies, the market value of all the assets, regardless of their nature, must be taken into account. Furthermore, the liabilities of the business must be ignored for this purpose. In the case of a business operated by a partnership or company the threshold of R10 million relates to the assets of the partnership or company as a whole, and not to the fractional interest of each partner or shareholder in the underlying assets of the business. Thus a partnership consisting of two equal partners which has assets of R20 million will not qualify as a ‘small business’, despite the fact that the fractional interest of each partner in the assets of the partnership does not exceed R10 million.
The sum of amounts to be disregarded during a person’s lifetime may not exceed R1,8 million.
The small business asset relief must be determined on an asset-by-asset basis. The asset must have been held for a continuous period of at least five years before disposal.
Disposal of small business assets on death
A deceased person may qualify for relief from CGT on capital gains adding up to R1,8 million in respect of the deemed
disposal of small business assets on death. This is a once-in-a-lifetime concession, and naturally if the deceased person had previously made use of the concession it will not be available on that person’s death.
The deceased estate is not entitled to any unused portion of the small business asset exclusion of R1,8 million because it would not have held the assets for at least five years, having acquired them from the deceased person on date of death. In this regard, while the deceased estate is treated as having disposed of an asset in the same manner as the deceased person, it is not treated as having acquired it on the same date as the deceased person. In addition, the date of acquisition of an asset by the deceased person is not carried over to the deceased estate.