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FAQ - 12 September 2017

12 September 2017   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. What costs can be included in the base cost when a sale is conducted?

Q: Are the conveyancing costs to register the original purchase in the taxpayer's name be considered to be "acquisition costs" ie can these be included in the base cost of the property when it is sold?

A: In terms of paragraph 20(1)(c) of the Eighth Schedule to the Income Tax Act, the following expenses may be added to the original cost (of acquisition) in determining base cost:

"...amounts actually incurred as expenditure directly related to the acquisition or disposal of that asset namely—

(i)                  the remuneration of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal advisor, for services rendered;

(ii)                transfer costs;

(iii)               …" 

In the SARS CGT guide, the following is said with regard to transfer cost:

“In the case of immovable property, transfer costs include the cost of obtaining a certificate of compliance for electrical installation as required by the Electrical Installation Regulation under the Occupational Health and Safety Act 85 of 1993, an electric fence system compliance certificate under the regulations in GG 34154 dated 25 March 2011 under the same Act and an entomologist’s certificate (required in KwaZulu-Natal and the Cape) for the purposes of effecting transfer. However, repairs necessitated by such inspections will not qualify. Bond registration and cancellation fees do not qualify as a transfer cost because para 20(2) prevents the inclusion in base cost of borrowing costs.” 

The fee of the conveyancer will also be transfer costs – incurred to give effect to the transfer of the property from the seller to the purchaser.

2. What are the tax implications when goodwill arises from a sale?

Q: A business acquired another, the price paid exceeded that of its asset base and therefore goodwill arose. Can the company deduct the amortisation for tax purposes?

A: The cost of the acquisition of goodwill is most likely capital in nature and will therefore not qualify for a deduction under section 11(a) the Income Tax Act.  There is also no section that specifically provides for the deduction of incorporeal assets, other than under section 11(gC) or section 11D – patents, etc. 

An adjustment in terms of IFRS is not a disposal for purposes of the Eighth Schedule.  It is only where the goodwill is disposed or otherwise disposed of (for instance lost) that there will be a disposal.  The mere diminution in the value of an asset (not only goodwill) is not a disposal or part-disposal.  

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.

 


 

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