Attention bookkeepers: If you don't know how to calculate Capital Gains Tax correctly, you'll miss out on paying lower taxes
Capital Gains Tax (CGT) has been around since October 2001.
But I keep finding many bookkeepers are still confused about what transactions attract CGT, and which ones don't.
It's important to exclude capital gains transactions from normal transactions to make sure you enjoy the lower tax on the capital profits.
Read on as I explain what CGT is and the correct method to calculate CGT.
What is Capital Gains Tax?
CGT is the tax you calculate on the disposal of an asset you hold for a long term.
And when we speak of disposal, this is when you sell, give away, scrap, exchange, lose, destroy, cancel or let go of an asset. And an asset is movable or immovable property, including gold or silver coins (but not cash or money). Or it could be the right or interest in such property.
So, let's say for instance, you sell a motor vehicle. You must calculate the profit or loss. And then calculate the inclusion rate at the rate of 66.66%, not at the normal income tax rate of 28%.
Read on for three items bookkeepers should look out for to determine if a transaction has a CGT implication…
Three items bookkeepers should look out for when capturing a transaction
If you receive a large amount of money, don't just assume it's part of your normal sales
Ask what it's for. If your company received it for the selling a capital asset i.e. property, plant and equipment (PPE), then, deduct the book value off the amount you receive.
Account for the net profit/loss as a 'profit/loss from selling PPE' in your income statement (statement of profit and loss).
If you receive money from an insurance company
If you receive a pay out from insurance company, for an asset that was stolen or was in an accident and written off, this is disposal in terms of the Income Tax Act.
Account for the difference between the book value and the money you receive as 'profit/loss on theft of an asset' in your income statement.
If you pay out money for the purchase of shareholders shares
Most likely this is a re-purchase of shares by the existing shareholders and isn't a capital gains event. The CGT is payable in the hands of the shareholder who sold his shares, and not in the business.
So, debit the existing remaining shareholders' loan account and credit the bank.
There you have it, now that you know what transactions attract CGT. Look out for my next article where I show you how to account for CGT correctly.
Discover how to account for transactions correctly in your company books improve your cash flow and eliminate simple accounting mistakes here...