The time of disposal is an important core rule which dictates when a capital gain or capital loss must be brought to account for Income Tax purposes.
Paragraph 13 of the Eight Schedule to the Income Tax Act No.58 of 1962 (8th Schedule to the IT Act) determine the time of disposal.
- It contains 3 categories of timing rules covering:
- Disposals involving a change of ownership effected or to be affected, because of an event, act, forbearance or by operation of law (para 13(1)(a)(i) to (xi))
- Disposal arising from specific events (para 13(1)(b) to (g)), and
- Acquisition of asset (para 13(2))
The following is the most important to note:
- An agreement for the disposal of the asset subject to a suspensive condition – Date on which the suspensive condition is satisfied.
- An agreement not subject to a suspensive condition – Date of conclusion of the agreement (usually the date when the offer is accepted).
Example – How time of disposal is determined when there is a suspensive condition:
Lindsay disposed of his luxury townhouse at Ballito to Nantha on 28/2/2020, subject to Nantha being able to obtain a bond. On 30 June 2020, Nantha obtained the bond, and on 15 August 2020 the property was transferred into his name. Therefore, the date of disposal would be 30 June 2020, when the suspensive condition was fulfilled.
[Source – SILKE: South African Income Tax – page 595].
It is important to note that the time of disposal rules merely determine the time at which time a disposal takes place and do not determine whether or not the proceeds from such disposal have been received or accrued.
Both paragraph 3 (determination of a capital gain) and paragraph 4 (determination of a capital loss) of the 8th Schedule to the IT Act require an amount to be received or accrued in respect of the disposal. Where the time of disposal is in one tax year but the proceeds only accrue in a subsequent year, a capital loss will arise (in the first year) because proceeds are nil in that year. It is only when proceeds accrue that a capital gain can arise.
[Source: – Notes on South African Income Tax – page 690].
Where a receipt precedes accrual, the gross income arises at the date of receipt.
An amount “accrues” to a taxpayer once he becomes unconditionally entitled to receive it. In other words, all legal steps necessary for the amount to be unconditionally vested in the taxpayer must have been completed.
Example – Time of disposal of capital asset in terms of the 8th Schedule to the IT Act:
A taxpayer (with a February year-end) sells a capital asset on 20 February 2019. The contract of sale is not subject to a suspensive condition but provides for delivery to take place 10 March 2019. The asset has a base cost of R1m and the selling price is R3m. The tax position is as follows:
Year ended 28 February 2019
- An asset has been disposed of (paragraph 2)
- The time of disposal is 20 February 2019 (Paragraph 13(1)(a)(ii))
- The base cost is R1m (Paragraph 20)
- The proceeds are R0.00 because accrual only takes place on 10 March 2019, when the asset is delivered. There have been occasions where SARS has treated the accrual as taking place at the time of disposal, because the view was taken that paragraph 13 also sets a date of accrual. This is incorrect. The time of accrual is in terms of the normal rules and has been well established in the case law over the last 94 years.
- A capital loss arises (paragraph 4(a)) on 20 February 2019.
- The loss is calculated as follows:
Base Cost (R1m)
Capital loss (R1m)
- The capital loss is carried forward to the 2020 year of assessment (paragraph 39A(1))
Year ended 29 February 2020
- A capital gain is determined (paragraph 3(b)(i))
- The capital gain is the proceeds which accrue in any year subsequent to the year of disposal.
- The gain arises on 10 March and is calculated as follows:
Proceeds R 3m
Capital loss brought forward (paragraph 39A(2)) (R1m)
Capital gain R2m
Although payment is conditional upon delivery, the agreement of sale itself is unconditional, so the time of supply is 20 February 2019, but the time of accrual is 10 March 2019.
These types of capital transactions do not occur regularly, but it is important to take note of how and when to declare the capital loss and the capital gain.
If you have any enquiries please contact Adri Britz at firstname.lastname@example.org
SAICA Student Handbook 2019/2020
SILKE: South African Income Tax 2020
Notes on South African Income Tax 2020
Comprehensive guide to Capital Gains Tax https://www.sars.gov.za/AllDocs/OpsDocs/Guides/LAPD-CGT-G01%20-%20Comprehensive%20Guide%20to%20Capital%20Gains%20Tax.pdf