Whenever you sell an asset, you have to pay capital gains tax (CGT). But there are some situations where it's not fair for you to pay capital gains tax on the disposal of your asset if you're not getting instant financial gain.
In these cases, your capital gains tax consequences are rolled-over and the asset are transferred on a tax-free basis. This is done to defer a capital gain or loss.
But when does this happen?
Read on to find out.
You get CGT
roll-over relief on the following:
1. Stolen, lost or destroyed assets;
2. Coluntary disposals;
3. Tax-free transfers of assets between spouses.
Today we'll take a look at the CGT consequences of stolen, lost or destroyed assets
First of all, let's see what non-depreciable assets mean: For tax purposes, a non-depreciable asset is a capital asset on which the Income Tax Act doesn't allow you to claim a wear-and-tear allowance as a deduction against your income
On the other hand, a depreciable asset is a capital asset on which the Income Tax Act does allow you to claim a wear-and-tear allowance as a deduction against your income. The rates used to calculate the allowance can be found in Practice Note 19 and interpretation note 47 on SARS's website.
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Note that you must spend the full amount you receive on a replacement asset and that roll-over isn't compulsory!
When it comes to non-depreciable asset, you won't have to pay capital gains tax on stolen, lost or destroyed assets you've insured or compensated for, if you meet the following four requirements:
1. The amount you receive mustn't be less than the base cost of the asset;
2. You must spend the full amount you receive on a replacement asset;
3. You must buy the replacement asset within 12 months from when the original asset was lost, stolen or destroyed (and not from the date you receive your compensation!); and
4. You must bring the replacement asset into use within three years of the disposal of your stolen, lost or destroyed asset.
If you take reasonable steps to conclude the contract or start using your asset, SARS can extend the timeframe.
If the replacement asset is a tax depreciable asset, the delayed gain you make on the lost asset must be included in your total capital gain consistent with the timeframe and wear-and-tear allowance claimed on the replacement asset.
The roll-over isn't compulsory so you can choose if the roll-over relief applies or not.
XYZ (Pty) Ltd's laptop computer is stolen. The base cost of the computer is R15 000 and the indemnity payment received from the insurer for the loss of the asset is R18 000. The company purchases a new laptop computer for R21 000. What are the capital gains tax
Disposal by theft:
Proceeds R18 000
Less: Base cost R15 000
Capital gain R3 000
Wear-and-tear of replacement asset:
Cost R21 000
Section 11(e) R7 000 x 3 years
XYZ (Pty) Ltd must include R1 000 (R3 000/3) of the capital gain made on the lost asset per annum for three years in it's aggregate capital gain/loss.