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Interpreting Some Core Concepts Governing the Taxation of Capital Gains

Saturday, 09 April 2005   (0 Comments)
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Interpreting Some Core Concepts Governing the Taxation of Capital Gains


Section 26A of the Income Tax Act 58 of 19621 provides for the inclusion, in a person’s taxable income, of any taxable capital gain determined in terms of its Eighth Schedule. The Eighth Schedule embodies a clear scheme for the determination of a person’s taxable capital gain or assessed capital loss for a year of assessment Its point of departure is the determination of a capital gain or capital loss in respect of the disposal of any asset of a resident and of specified assets of a non-resident. A capital gain or capital loss resulting from such disposal is determined with reference to the proceeds in respect of that disposal and the base cost of the asset so disposed of. ‘Asset’, ‘disposal’, ‘proceeds’ and ‘base cost’ are defined concepts which form the basic building blocks or core concepts of the Eighth Schedule. The statutory concepts of ‘asset’ and ‘disposal’ play a crucial role in this regard, as an event is recognized as a taxable event for purposes of the Eighth Schedule only if that event amounts to a ‘disposal’ of an ‘asset’ as defined.

Both ‘asset’ and ‘disposal’ have been defined in very wide terms. Some aspects of the definition of ‘asset’ bear some resemblance to the definition of ‘asset’ originally adopted for purposes of the taxation of capital gains in Australia. The dispensation originally adopted in Australia was also based on concepts of ‘asset’ and ‘disposal’. July Cassidy has in the light of these similarities argued that the South African Legislature adopted the same prerequisites and definitions. Bob Williams also seems to be of the view that the concept of an ‘asset’ was probably influenced by the Australian example and experience in this regard. Cassidy argues that the same criticism may be levied at the resulting product as that to which the Australian dispensation was subjected. Her criticism is directed primarily atthe fact that ‘asset’ has been defined in terms of property. This suggests, in her view, that the concept is limited to rights that are capable of transmission from one person to another and that personal rights that are not capable of transmission and valuation, do not constitute as sets so defined. She also argues that the Eighth Schedule does not adequately accommodate such rights even if it can be argued that the concept of ‘asset’ extends to such rights. She goes so far as to suggest that the legislation is in herently unworkable when applied to personal rights and, in particular, rights that are not capable.

The recognition, as assets, of personal rights created by contract implies that the conclusion of a contract and performance in terms of it result in consecutive disposals. This creates, in Cassidy’s view, the danger of double taxation, as the Eighth Schedule lacks reconciling rules similar to the Australian rules preventing double taxation. The Eighth Schedule further suffers, in her view, from a lack of clear rules regarding the acquisition of an asset. Finally, the recognition, as a disposal, of the creation of an asset, seems to envisage, in her opinion, instances in which an asset is acquired by its creator rather than disposed of by that creator to another person.

I do not propose to analyze the differences between the rules in terms of the Eighth Schedule and those applying in respect of the original Australian dispensation. I contend that the concepts ‘asset’ and ‘disposal’ must be interpreted within their context in the Eighth Schedule. They are applied within a framework consisting of rules governing the recognition as well as the non-recognition of certain events as disposals, the time of recognition of some disposals, the base cost of an asset and the proceeds from its disposal, the valuation of an asset, the limitation of some capital losses, and the deferral or exclusion of some capital gains or capital losses. Some long-standing principles of the ITA have also been imported into the Eighth Schedule. These rules and principles contain various indications regarding the meaning of ‘asset’ and‘ disposal’, the concept of the creation of an asset as a disposal, and the manner in which a disposal effected in terms of a prior contractual obligation must be taken into account.

Source: By Gerard Swart (University of South Africa)

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