Escaping the higher capital gains tax rate

Barry Ger, senior manager for corporate tax at KPMG: www.moneywebtax.co.za

A window of opportunity opens for some companies.

If your company is thinking of selling any capital assets and its year end is not February or March there may be a window of opportunity to do it at the lower effective tax rate for a short while.

In his Budget Speech on February 22 2012, Finance Minister Pravin Gordhan announced increases to the capital gains tax (CGT) rates. Companies, trust and individuals would now be paying 18.6% (previously 14%), 26.7% (previously 20%) and a maximum of 13.3% (previously a maximum of 10%) respectively of any capital gain that arises in their hands from the sale of their assets over to the South African Revenue Service (Sars).

In a new tax bill released on March 13 2012, it has been proposed that these new rates will take effect from tax years beginning from March 1 2012. The tax years of individuals and trusts perennially begin on March 1 anyway so for them the new rates apply already. The tax years of companies, on the other hand, have a multitude of different starting dates which means that some companies, specifically those with tax years that do not begin in March, have a short period in which they can still benefit from the lower rates. This period is, of course, longest for companies with tax years that commence much later in the calendar year or even in the next year. Companies with January 31 financial year ends, for example, will have almost 11 Months, until February 1 2013, to dispose of their assets before the new 18.6% rate kicks in.

The question arises though whether a company that makes use of this opportunity and sells off many of its high value assets before the end of its current tax year would be investigated by Sars for tax avoidance. The answer to this is probably not. Provided the company has primarily a commercial (but non -tax related) reason for making such disposals, it is unlikely Sars would be able to make such a claim stick.

It would be the height of foolishness, of course, for companies to rush off to sell their assets so as to take advantage of the lower rate. The tax tail should never wag the commercial dog. However, for those who were contemplating a sell-off anyway, the looming increase in CGT rates would no doubt spur them to make such decisions sooner rather than later.

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