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Three basic methods are provided to determine the valuation date value of an asset, namely, market value, time-based apportionment and 20% of proceeds. As a result of concern that these valuation date values could be overstated, particularly when the market value method is used, a number of loss-limitation rules were introduced, known as ‘kink tests’. These kink tests have the effect of substituting a different valuation date value from the one adopted by a taxpayer. They do not apply when a taxpayer has adopted the weighted average method for determining the base cost of certain identical assets such as listed shares and unit trust investments.
The applicable kink test depends on whether the taxpayer has –
- a historical gain (proceeds exceed pre- and post-1 October 2001 expenditure), or
-
a historical loss or break even situation (proceeds are less than or equal to pre andpost -1 October 2001 expenditure).
Historical gain
In the historical gain situation a person has the freedom to choose, with one limitation,
– any one of the three valuation date value methods, namely,
- market value,
- time-apportionment
- or 20% of proceeds.
– The limitation applies when the market value method has been adopted and a capital loss results.
The time-apportionment base cost calculator will provide the capital gain generated by the market value or 20% of proceeds methods when they give a more favourable result than time-apportionment. Any capital loss generated by the adoption of the market value method will be limited to nil.
Historical loss/break even
When there is an historical loss or break even situation, the outcome is predetermined and there is no freedom to choose an alternative valuation method. The kink tests may substitute a different valuation date value in the place of the time-apportionment method. When using the time-apportionment base cost calculator, in order to apply kink tests, users must simply answer the question whether they have determined a market value on 1 October 2001 or whether one has been published in the Gazette. They must then insert that market value in the space provided. This should be done where the asset was valued as at 1 October 2001 on or before 30 September 2004 or where the price of the asset was published in the Government Gazette (e.g. as in the case of SA listed shares and SA collective investment schemes).
