Any taxable capital gain made on the disposal of an asset by a person is included in the taxable income of that person. Up until years of assessment commencing on or after 1 April 2006 PBOs enjoyed complete exemption from Income Tax and CGT but the law was subsequently change to introduce a partial taxation system under which PBOs became taxable on trading activities in excess of prescribed limits. PBOs accordingly no longer qualify for full exemption from CGT. As from the first day of their first year of assessment commencing on or after 1 April 2006 any capital gain or capital loss made by a PBO on the disposal of an asset which has been used for a business undertaking or trading activity or substantially the whole of which has been used in such an undertaking will not be disregarded.
- Capital gain or capital loss to be disregardedAny capital gain or capital loss made by a PBO on the disposal of an asset which has been used in the following three categories will be disregarded:
- Non-trading assetsThis category applies to assets which have not been used by the PBO on or after the valuation date in carrying on any business undertaking or trading activity. This includes assets which have been used exclusively for conducting public benefit activities (PBAs). Only the usage of the asset on or after the valuation date is taken into account. Any trade usage before that date is ignored.
- Minimal trading assetsThis category applies where substantially the whole of the use of the asset by the PBO on or after valuation date was directed at a purpose other than carrying on a business undertaking or trading activity. An example of such an asset is one that is used 10% of the time for trading purposes and 90% of the time to conduct PBAs. Of critical importance are the words “substantially the whole of the use”. This expression is accepted to mean 90% or more. However SARS is prepared to accept a usage of not less than 85%. The assets referred to in this category are excluded from the first category as they are used, albeit to a limited extent, in carrying on a business undertaking or trading activity. The percentage of the asset used for trade or business purposes must be determined using a method appropriate to the circumstances such as one based on time or floor area.
- Permissible trading assetsThis category applies when substantially the whole of the use of the asset by the PBO on or after valuation date was directed at carrying on a business undertaking or trading activity which qualifies for exemption.Top tip: Any capital gain or capital loss made on the disposal of an asset used in a trading activity or business undertaking as contemplated in the basic exemption rule will not be disregarded.
The permissible business undertakings or trading activities are as follows:
- Related trade. In terms of this exclusion rule the receipts and accruals derived from a trading activity or business undertaking of a PBO will not be subject to income tax if the trading or business activity – – is integral and directly related to the sole or principal object of the PBO, – is carried out or conducted on a basis substantially the whole of which is directed towards the recovery of cost, and – does not result in unfair competition with other taxable entities.
Occasional trade. In order to qualify under this item the business undertaking or trading activity must –– take place on an occasional or infrequent basis; and– be undertaken substantially with assistance on a voluntary basis without compensation. This excludes the bona fide reimbursement of reasonable and necessary out-of-pocket expenditure.
The law here is slightly more complex and changed in 2007.
Clubs are no longer able to automatically disregard capital gains and losses on the disposal of any of their assets. The new rules for recreational clubs came into operation on 1 April 2007 although this date has been extended for certain clubs as discussed below.
A club that enjoyed full exemption of its receipts and accruals and which applied before 31 March 2009 for approval must comply with section 30A from the effective date, namely, the first day of its first year of assessment commencing on or after 1 April 2007.
A club that enjoyed full exemption on all its receipts and accruals and which had not applied for approval will continue to enjoy complete exemption from income tax up to and including its last year of assessment ending on or before 30 September 2010.
A recreational club which has been approved may elect to be granted roll-over relief on disposal of its assets. The roll-over relief granted to clubs entails a deferment or delay in paying the CGT on a taxable capital gain made on the disposal of an asset, provided the proceeds are used to acquire a replacement asset. The liability for CGT will arise upon the subsequent disposal of the new asset purchased to replace the asset disposed of. No exclusion applies to the disposal of investments such as shares and participatory interests in collective investment schemes.
For the interpretation of taxation laws applicable to PBOs and Recreational clubs, you can read Interpretation Note 44 (issue 2) and Binding General Ruling 20 (Income Tax ) –Interpretation of the expression “substantially the whole”