What is a Capital Gain?
Asset disposed of in current year
A person’s capital gain during the current year is equal to the amount by which the proceeds received or accrued on the disposal exceed the base cost of the asset.
The words “in respect of’’ make it clear that amounts received or accrued before the disposal of an asset must be brought to account as proceeds in the year of disposal in calculating a capital gain. A receipt or accrual causally connected to a disposal will qualify as part of the proceeds from such disposal in spite of the fact that such receipt or accrual may have preceded that disposal. The determining factor is whether the proceeds were received or accrued ”in respect” of the disposal.
Asset disposed of in an earlier year
Sometimes an asset is disposed of in a previous year of assessment and the capital gain or loss will have been determined and taken into account in that year of assessment. However, if any of the events shown in the table below occur in a subsequent year they will give rise to a capital gain in that year.
Events giving rise to a capital gain in a year subsequent to the year of disposal
Events giving rise to a capital gain in a year subsequent to the year
|Receipt or accrual of further proceeds not previously accounted for|
|Recovery or recoupment of part of the base cost not previously accounted for|
In the case of a pre-valuation date asset
Capital gain arising from receipt or accrual of further proceeds
The receipt or accrual of further proceeds in the current year of assessment from the disposal of an asset in an earlier year will give rise to a capital gain in the current year. This rule does not apply to the extent that the proceeds have been taken into account –
- in determining a capital gain or loss in any year, or
- in the redetermination of the capital gain or loss
The first exception is self-explanatory and simple. If the amount has already been taken into account in determining a capital gain or loss, it cannot again be taken into account as this would result in double taxation.
The second exception applies when further proceeds are received from the disposal of a pre-valuation date asset in an earlier year.
Example – Proceeds accruing following disposal of asset
Magdelene acquired business premises after 1 October 2001 at a cost of R1 million.
On 28 February of year 1 she sold the property to Kayzita on the following terms:
R1 200 000 payable on 28 February of year 1.
The following amounts payable, each on condition that the net rental return exceeds 10% in the relevant year: R100 000 (year 2), R110 000 (year 3), R120 000 (year 4), R130 000 (year 5).
|R 1 200 000||R 100 000||R 110 000||R 120 000||R 130 000||R 1 660 000|
Less: Base cost (1 000 000) – – – – (1 000 000)
Capital gain 200 000 100 000 110 000 120 000 130 000 660 000
Capital gain arising from recovery or recoupment of base cost
A further capital gain will arise in the current year when any portion of the base cost, that was taken into account in determining a capital gain or loss in a previous year, is recovered or recouped in the current year. The recovery or recoupment may take place in the form of –
– a cash refund,
– repossession of the asset
– or cancellation or reduction of all or part of the debt incurred in acquiring the asset, whether by prescription or in any other way.
This rule does not apply in the case of a pre-valuation date asset. The capital gain or loss is determined from scratch taking into account the recovery or recoupment of the base cost. At the same time the previous capital gain or loss is reversed out as a capital loss or gain respectively.
Example – Base cost recovery through reduction in purchase price
Bryan purchased a beach cottage in year 1 and shortly thereafter discovered that it was infested with white ants. The seller had not informed him of the infestation. He sold the property in year 2 and realised a capital gain of R15 000 on which he was assessed in that year. In the meanwhile he sued the seller of the property for misrepresentation and after a protracted legal battle received a discount on the purchase price of R18 000 during year 5.
The recovery of R18 000 will be reflected as a capital gain in Bryan’s return of income for year 5.