Capital Gains Tax (CGT) was introduced on 1 October 2001, and one of its fundamental principles is that the part of the gain on disposal of an asset which relates to the period before that date is exempt from the tax.
The exemption can be calculated either by apportioning the whole gain on a time-basis, to periods before and after 1 October 2001, or by comparing the value of the asset on that date with the disposal proceeds.
Valuation on 1 October 2001, the so-called valuation date value, is thus of central importance in quantifying chargeable gains. It will decline in significance as we move forward and pre-valuation date assets form a smaller part of the population of capital assets, but for the next year or so it is probably the single most important CGT issue.
If that is so, why are relatively few taxpayers who held capital assets on valuation date giving the issue the attention it demands?
The law stipulates unequivocally that all valuations must be made by 30 September 2003, or the opportunity to use the valuation basis to calculate gains is lost and the time-apportioned basis will have to be used.
A simple example illustrates the point:
Mr A bought an asset for R100 on 1 October 1996 and sold it for R1000 on 30 September 2003. It was valued at R900 on 1 October 2001, so most of the increase in value occurred prior to the start of CGT.
The gain using the valuation is R1000 - R900 = R100 but if the time-apportionment method is used, the overall gain of R900 is split (five years before CGT/two years after) into exempt R643, and chargeable R257.
Failure to make the valuation would therefore cost Mr A what could be a significant amount of cash.
Values of South African listed shares, bonds and unit trusts have been published by the SA Revenue Service (SARS), which everyone must use if the valuation basis is chosen. But this still leaves a vast array of assets, which potentially require to be valued before 30 September 2003.
Don`t expect that if you leave the valuation until next September that you will easily find a professional valuer to do the work for you. Of course you don`t have to use a professional; you can do the job yourself, provided you know what you are doing.
If you get it wrong however and SARS decides on a different valuation, you lay yourself open to penalties, and a suspect valuation may be just the excuse SARS needs to investigate your affairs.
If you decide that it would be safer to have assets valued, you must start by identifying the relevant assets. Some of these are easier to value than others land and buildings for example. But what if you own shares in an unlisted company, or shares listed overseas?
If you have built up your own business, what was it worth on valuation date? You will need to value the fixed property, but what about the goodwill or trade name?
It`s probably not worth the effort of valuing items of Plant and Machinery or vehicles unless you think you might sell them for more than they cost.
You do however need to consider the value of intangible assets. If they cost you nothing, or you wrote off the costs against income, you have no allowable cost if you use the time-apportionment basis to calculate gains. You might however be able to justify a valuation on 1 October 2001, which could save you a good deal of money.
A two year window was allowed in which to make your valuations at 1 October 2001, and if you have allowed almost half of that time to run away without doing anything about valuations, you need to think seriously about making the effort now.
The longer you put off the issue, the more difficult (and expensive) it will be to make the valuations and you may end up having to do the work yourself.
If many valuations are required across a range of assets you must approach the whole project systematically, and you are likely to require professional help.
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