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Be warned: Changing your business intention affects your CGT liability

by , 03 September 2014
It may surprise you, but your business intention when you make a profit can have an effect on your capital gain.

Something as simple as intending to use the profit from the disposal of an asset to replace it, can move SARS to charge you Capital Gains Tax (CGT) or suspend the tax of that transaction.

But you must be careful. Your business intention can also land you in CGT trouble.

Here's what you need to know to ensure your intentions help your company, not hurt it...

 

Here's how your business intentions can reduce your Capital Gains Tax liability

 
It's possible for your intention to change over time. However, a mere change in your circumstances doesn't necessarily imply a change in intention.
 
Sound complicated?
 
Here's an example to help explain.
 
Fred Ncube decides to sell the business premises where he based his company for the last four years. He purchases a larger property in preparation for the new employees he wants to hire. 
 
Six months after Fred's company moves into the new business premise, his headquarters instructs him to relocate his business to another province. He puts the new business premise back onto the market. Because the premises are in a desirable area and the property market is good, Fred's company makes a substantial profit on its sale. 
 
But how does Fred's intention change his CGT liability in this situation?
 
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Here's how Fred's intentions change how the courts will rule on his CGT liability

 
Fred's intention was for the new business premise to be a long-term investment. His intention didn't change – only his circumstances. 
 
He should, therefore, have a strong case for proving the profit he got from the sale of the premise is of a capital nature, regardless of the fact that he only owned the premises for a short period. This means because he didn't buy the property to flip, SARS may suspend his CGT liability on that profit.
 
As you can see your intention plays a big role on how the courts will rule on your company's CGT liability.


PS. Here are three instances where you don't have to pay Capital Gains Tax... And eight other ways to LEGALLY beat the taxman!


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