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Capital Gains Tax
Valuations: the deadline date is 30 September 2003
The general experience is that far too few clients have had their valuations prepared, and time is quickly running out.
What must be valued?
Virtually all assets acquired before 1 October 2001 must be valued as at that date. This includes immovable property (including private residences), plant, machinery, other business assets, businesses (as a whole), branches or divisions of business which can be disposed of separately, second hand insurance policies, goodwill, patents, trade marks, other intellectual property, private company shares, close corporation members’ interests, etc. The assets in question could be owned by natural persons, companies/close corporations, trusts, partnerships, etc. Rights to assets (e.g. income rights and usufructs) must also be valued. Bear in mind that assets owned by entities must be valued as well as the shares in the entity itself. All overseas assets must also be valued including listed company shares.
Only personal-use assets can be ignored. South African listed company shares, unit trusts and bonds, if their prices are regularly quoted, can be ignored as their value at 1 October 2001 is readily determinable and already published in the Government Gazette and on the South African Revenue Service (SARS) website (www.sars.gov.za).
How must assets be valued?
Valuations must be prepared on the basis of the price which would be obtainable on a sale between a willing buyer and a willing seller transacting at arm’s length in an open market. There are special rules for some assets e.g. for second hand insurance policies, it is the higher of the surrender value and the insurer’s fair market value as if the policy runs to maturity.
Why must I value? / What if I don’t value?
Capital gains tax (CGT) is payable on capital gains i.e. proceeds of disposal less base cost of the asset disposed of. The base cost of assets acquired before 1 October 2001 is the value on 1 October 2001 (the valuation date value) plus base cost type expenditure incurred after that date in respect of that asset. Valuation date value is, at the option of the taxpayer:
- · the market value on 1 October 2001, or
- · 20% of the proceeds of disposal, or
- · the time apportionment base cost. This method requires proof of all costs incurred to date.
Unless you have a valuation prepared as set out in this article, the valuation option will not be available for you and you may be left with less advantageous options.
By when must valuations be done?
30 September 2003.
By when must the valuations be submitted to SARS?
In general, valuations must be submitted to SARS with the tax return for the year during which the particular asset is disposed of.
In the following cases however, valuations must be submitted to SARS together with the first tax return submitted to SARS after 30 September 2003.
- · In respect of any asset valued at more than R10 million;
- · In respect of an unlisted company share, where the market value of all shares in that company held by the taxpayer exceeds R10 million;
- · In respect of any intangible asset (other than a financial instrument), where the value exceeds R1 million i.e. a patent, trade mark, goodwill, etc.
What valuation records must be maintained?
There is no requirement as to who should prepare the valuation. You can value your own assets or seek outside help. The valuation must, however, be in writing and fully motivated. SARS have the right to query and adjust the valuation if it cannot be supported by properly motivated and reasoned written documentation showing clearly the method of valuation used. Obviously the more qualified the valuer and the more reasoned the documentation, the less likely it will be that the valuation will be queried.
The valuation must be summarized on the one page SARS valuation form, which must be signed both by the valuer and the taxpayer. Copies are available on the SARS website (www.sars.gov.za). Each asset must be separately valued.
All relevant assets should be valued. If your business is owned by a company/close corporation, you will need to value all the business assets separately including intellectual property such as goodwill. But you will also need to value the shares or members’ interest in the company/close corporation.
As evidence of valuations may only be needed far into the future when the asset is sold by you or even by your surviving spouse if the asset is bequeathed to him or her, it is essential that the valuation records are kept in a safe accessible place.
Conclusion
Valuations, to be valid, must be performed and documented before 30 September 2003 (i.e. less than 4 months away).
Act now before it is too late!
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