CGT will take time to bed down

Issued by Deloitte & Touche

Johannesburg, 02 Oct 2001

While capital gains tax (CGT) officially made its debut in SA yesterday, it will be a good six months before the tax has been bedded down, says Marc Krisp, tax partner at Deloitte & Touche.

However, while it would take some time for the SA Revenue Service (Sars) to get itself prepared, taxpayers should use the time to get their own houses in order, Krisp said at a CGT seminar in Johannesburg today.

"Taxpayers have until September 2003 to perform a valuation of their assets, which is plenty of time, but there are no grounds for complacency," he argued. Krisp referred specifically to intangible assets in a business, as a problem area.

"Owners of businesses typically sell the shares in a business, as opposed to the assets, but the situation may require the sale of the assets themselves. In this case, a proper valuation of a base cost of the assets is needed."

Krisp spoke also on difficulties surrounding "cascading", whereby corporate restructurings and unbundlings would be treated as CGT events. Krisp said some relief was needed for corporate actions but that it would take time for such legislation to be promulgated, since it would require some major changes to company law.

"In the meantime, our advice to companies is to remove the `spaghetti` in group structures, and so minimise CGT problems later. Corporates should also look at where they house their assets and try to match gains against losses."

Peter Harrison of Deloitte & Touch said the new CGT could impose major cash flow hardship on taxpayers in certain instances, such as when taxpayers emigrated. This is deemed as a disposal, even when no cash has been realised on the assets.

There was also no relief in cases where receipt of payment for a disposal is spread out over a long period, he said.

Harrison said CGT was a "creeping" tax, in the sense that larger gains are likely to be realised over a longer period than in the short term. "Taxpayers will see a small impact on disposals over the next year or so, but this will rise in time," he said.

Krisp said the code for CGT remained incomplete and that as such, uncertainty will continue in many key areas, such as valuations.

"The code will doubtless become more and more complex as forms of relief are incorporated and loopholes closed. We anticipate Sars feeling the strain of administering CGT, as well as litigation arising out of the interpretation," he said.