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How do I calculate the capital gain on the sale of a member’s interest in a CC?

Wednesday, 22 April 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: In 2007 four of us started a CC. We each put in R300 000 (which is now the amount of our loan account. I sold my share for R500 000. When we started the CC we took out a bank loan to purchase a property and then rented the premises out. I need to work out the CGT on the sale of my member interest. Would it just be the difference of selling price R500 000 less loan account R300 000 which is R200 000 or can I use some of the legal fees when we purchased the property as part of my base cost?

Is the capital gain only the difference between my sale price and my loan account? Or may I add some of the legal fees onto my base cost?

A: We are not sure that we understand the facts correctly.  You state that ‘each member contributed R300 000’, but then that these amounts are now in the loan account.  Our guidance assumes that the contribution was in fact advanced by way of a loan.  Principally there are two assets, the member’s interest and the loan account. 

The base cost of the loan account would then be R300 000 and we don’t have any detail of the base cost of the member’s interest.  The guidance / principles that follow apply to both. 

With regard to the legal fees when we purchased the property

We accept that the legal fees related to the acquisition of the property and that the property was registered in the name of the CC.  As such it does not constitute an amount actually incurred as expenditure directly related to the acquisition or disposal of that asset (the members interest or the loan) – refer to paragraph 20(1)(c)(i) of the Eighth Schedule to the Income Tax Act that refers to the remuneration of consultant or legal advisor for services rendered.  It is expenditure incurred by the CC and not by you. 

Increase of base cost

Base cost can only be ‘increased’ by expenditure actually incurred and listed in paragraph 20(1) of the Eighth Schedule to the Income Tax Act.  From the facts we are not sure that you incurred any expenditure other than the R300 000. 

The capital gain will be difference between the amount received in respect of the disposal of the member’s interest and its base cost and with respect to the loan, the amount received less the original amount of the loan. 

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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