You have just over a year to have the assets you owned on October 1 last year valued. But you may be wondering which assets to value and why.
The main reason for having your assets valued is that it gives you a greater choice of methods to determine the "base cost" of the asset.
This choice will enable you to use the most favourable method to calculate the base cost of the asset, thereby limiting the capital gains tax (CGT) you will have to pay when you sell the asset. The base cost of an asset is the value that you may deduct from the proceeds of its sale in order to determine your capital gain.
If you buy, or have bought, an asset since October 1 last year, the base cost of that asset is the actual cost of the asset - the initial cost and the cost of any improvements. For this reason, you need to keep records of all the costs relating to an asset. But if you bought the asset before October 1, 2001, there are a number of methods for determining the base cost.
So, how does having your assets valued give you greater choice? The answer to this revolves around the methods set down for determining the base cost of assets you bought before October 1 last year.
To illustrate each situation, let's assume you bought an asset on October 1, 2000 for R50 000 and that its market value on October 1 last year was R80 000. You did not spend any more money on the asset after you bought it. And let's ignore the inclusion rates (the percentage of the gain which is taxable, for example, 25 percent for an individual) and also assume that you have already used the the annual CGT exemption of R10 000 for individuals.
If the proceeds of the sale of this asset are more than what you spent on purchasing and improving it, you may choose any one of the following methods to determine the base cost:
- Market value on October 1, 2001, as formally determined; or
- 20 percent of the proceeds of the sale after deducting an amount equal to any expenses incurred after October 1, 2001 from those proceeds; or
- The time apportionment method.
These methods may be used to calculate the base cost of all types of assets, excluding financial instruments, for which there are special rules if you have chosen to use the weighted average method.
Let's assume you sell the asset in October 2002 for R90 000. Here is what your taxable gain will be using the three different methods:
- Market value method
R90 000 - R80 000 = R10 000
- 20 percent method
R90 000 x 20 percent = R18 000
R90 000 - R18 000 = R72 000
- Time apportionment method
R90 000 - R50 000 = R40 000 . R40 000 O 2 = R20 000
R20 000 x 1 = R20 000
Clearly, in this example the market value was the best option.
If you don't know how much you paid for an asset and you don't know the expenses that were incurred before October 1 last year, associated with that asset, you may choose one of the following methods to determine the base cost:
- The market value on October 1, 2001 - a taxable gain of R10 000 in the example above; or
- 20 percent of the proceeds of the sale after deducting the expenses that you incurred after October 1, 2001 - a taxable gain of R72 000 using our example above.
If, however, when you sell the asset, the proceeds are less than the market value, the base cost will equal those proceeds less expenses that were incurred after October 1, 2001. Thus, in the example above the base cost will equal the proceeds because no expenses were incurred after October 1 last year, and so there won't be a capital gain or loss.
On the other hand, let's say you sell the asset (once again, excluding financial instruments if the weighted average method is used), and the proceeds of the sale of the asset:
- are less than the costs of purchasing the asset and any further costs incurred before October 1 2001, and
- are less than the market value on October 1 2001.
In this case, the value you must use as the base cost will be the greater of the market value on October 1, 2001, or the sale proceeds less any expenses incurred after October 1, 2001.
For example, if the proceeds of the sale were R40 000 (which is less than the original cost of R50 000) and the market value on October 1, 2001 was R45 000, the base cost will be the greater of the market value on October 1, 2001 (R45 000) or the sales proceeds (R40 000). Thus, the base cost will be R45 000 and you will have made a capital loss of R5 000 to be offset against other capital gains. If there had been no market value the capital loss would have been nil.
If, however, the proceeds are less than the pre-October 1 purchase price and expenses, but the market value on October 1, 2001 is greater than this cost, you must use the lower of either the market value or an amount determined under the time-based apportionment method.
Using our example, the original purchase price is R50 000, the market value is R80 000, but the proceeds are R40 000. The base cost will be the lesser of R80 000 (the market value) or R45 000 (the base cost determined using the time-based apportionment method - that is, R50 000 - R5000 = R45 000).
This may all sound very complicated, but on the date that you sell an asset, you will be able to determine where you need to look to establish what your choices are, based on the proceeds of the sale in relation to the expenses incurred before and after October 1, 2001 and the market value.
What is clear is that, if you have not established the market value of your assets on October 1, 2001, your choices are severely limited, and the result might be costly.