Important CGT Implication when concluding a rental lease for business premises
30 April 2014
Posted by: Author: Simangele Mzizi
Author: Simangele Mzizi (FSP Business)
Business owners neglect to consider the
Capital Gains Tax (CGT) consequences before signing a lease agreement for the
rental of business premises. Failing to do so will have a significant effect on
the tax cost of business operations.
Simangele Mzizi developed a practical example on the CGT implications entering into a lease agreement to rent business
Example - Fast Food Enterprise
Mr Smith is the owner of a fast food
business, which carries on its trade as a sole proprietor. On 1 March2006, Mr
Smith enters into a five-year lease for the rental of business premises ending
28 February 2011.
Mr Smith improves the premises voluntarily
with the consent of and ultimately for the benefit of the landlord. He spends
R200 000 on improvements. The R200 000 is spent in year one.
Capital Gains Tax:
On termination date (28 February 2011) of
the lease, the transaction result in a disposal for CGT purposes.¹
The CGT consequences for Mr Smith are
nil (No receipt or accrual to Mr Smith)
cost R200 000 (Cost of improvements)
Capital gain/ (loss) R (200 000)
The result is that Mr Smith will incur
a capital loss of R200 000 on the termination of the lease, five years after he
incurred the expense. However, a capital loss can't be offset against taxable
In addition, Mr Smith will not be
allowed to deduct the cost of the improvements for income tax purposes because
the improvements don't qualify for a deduction since there's no contractual
obligation to effect improvements and he is not allowed to claim a wear and
tear allowance on qualifying assets if he's not the owner of the assets.
The effect is that if you're entering
into a lease agreement for the rental of business premises, make sure you
consider the CGT implications of your decision.
¹ Paragraph 11(1) (b) of the Eighth Schedule of the
Income Tax Act No. 58 of 1962.