A person may elect that a capital gain arising on disposal of an asset other than a financial instrument by operation of law, theft or destruction must be held over until the disposal of its replacement asset provided that the following conditions are met:
- The asset must be disposed of by way of operation of law (for example, expropriation), theft or destruction.
- Proceeds must accrue to the person by way of compensation (for example, an insurance payout).
- The proceeds must be equal to or exceed the base cost of the asset (that is, a capital gain or break-even situation). When a capital loss arises this provision does not apply, as most persons would want to claim the capital loss in the year of assessment in which it arises. This provision also applies when the proceeds are equal to the base cost of an asset. This requirement is necessary because despite not having a capital gain, a person may have a recoupment and in order to defer the recoupment this provision must also apply.
- If less than all the proceeds are expended in acquiring a replacement asset the relief will not apply. It is possible, however, to acquire a replacement asset costing more than the proceeds realised upon the disposal of the old asset.
- The relief applies when an amount at least equal to the receipts and accruals from the asset disposed of ‘has been’ or ‘will be’ expended to acquire one or more asset as ‘replacement asset or assets’. The replacement asset must fulfil the same function as the old asset. For example, if a person receives compensation for the expropriation of a farm and invests the proceeds on loan account in a company, the relief will not apply. A new farm must be acquired. It is also worth noting that the new asset must be ‘brought into use’. The use of the words ‘has been’ indicates that it is possible to acquire a replacement asset before disposing of the old asset. When the replacement asset is acquired in advance of the involuntary disposal of the old asset, there should be a causal link that confirms that the new asset is indeed a ‘replacement’.
- All the replacement assets must be from a South African source, namely,
- any South African immovable property (including shares in a property company under certain conditions),
- any other asset of a resident not forming part of a permanent establishment (PE) outside South Africa and which is not subject to foreign taxation, and
- any other asset of a non-resident that forms part of a PE in South Africa.
This provision is designed to prevent a non-resident who would be subject to CGT on South African immovable property or assets of a PE in South Africa from replacing such assets with non-taxable assets from a non-South African source.
- The relief applies when the contract for the replacement asset has been or will be concluded within 12 months of the disposal of the asset. The words ‘has been’ cover the situation in which the replacement is acquired before the disposal of the old asset.
- All the replacement assets must be brought into use within three years of the disposal of the asset. A replacement asset may be acquired (contract concluded) and brought into use before the disposal of the asset being replaced.
- The Commissioner may extend the 12-month and three-year periods by no more than six months if all reasonable steps were taken to conclude those contracts or bring those assets into use.
- The asset must not be deemed to have been disposed of and to have been reacquired by the person. For example, the relief will not apply in a ‘degrouping’ situation in which a deemed disposal and immediate reacquisition is triggered.