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How to reorganise your business and save your company from triggering immediate capital gains tax

by , 29 April 2013
Tired of paying thousands to SARS every year? Well I've got some good news for you. I have one way you can reorganise your business without triggering immediate capital gains tax bill. Let's have a look how...

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How to pay R23 963.20 less tax on your travel allowance

The obvious first step is to keep an accurate logbook.

But what SARS doesn't want you to know is how you can save R23 963.20 just by doing so.

So, let's see how to make this saving...

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Dispose of your capital assets in exchange for equity shares

If you conduct business as a sole proprietor and want to set up a company you can transfer your business assets to the corporate entity without incurring any capital gains tax liability using a company formation transaction.

But it's not that easy. There are some requirements you must meet to qualify to use a company formation transaction to minimise your capital gains tax:

• You must be employed on a full-time basis or you must hold at least 20% of the equity shares or voting rights in the newly formed CC. This must be in place by the close of business on the day you transfer the assets to the CC;

• The CC must keep the assets for a period of 18 months after the transfer or you'll lose the capital gains tax relief; and

• You must dispose of the assets at the base cost.

Example

In the formation of the new Company James disposes of the following equipment to the Company in exchange for 50 ordinary shares at R1 per share.

 

Base cost

Market value on disposal

Computer        

R30 000

R20 000

Manufacturing equipment         

R50 000

R60 000

James holds 100% of the issued equity share capital of the company at close of business on the day the assets were transferred and he's engaged on a fulltime basis in rendering services to and on behalf of the company.

Two years later the company sells the manufacturing equipment for R66 000 and the computer equipment for R20 000.

Let's see what the capital gains consequences are...

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Are you committing Financial Suicide?

Before you do another thing, read this special report to see if you're one of several companies making these five tax mistakes...

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Computer equipment

Manufacturing equipment

Proceeds:                 

R 20 000 (At market value)

R 50 000

Less: Base cost       

R30 000

R 50 000

Capital gain/(Loss)

(R10 000)

R    nil

 

1. The disposal takes place at market value between the two parties;

2. The disposal doesn't qualify for capital gains tax relief because the market value of the asset is less

than its base cost at the date of transfer of the computer;

3. The loss is 'clogged' because it's incurred in a transaction involving a connected party. The effect is that the capital loss can only be set off against capital gains made with connected parties and not any capital gains involving third parties; and

4. The manufacturing equipment is transferred on a tax neutral basis from James to the company as part of the company formation transaction. The proceeds are considered equal to the base cost.

Sale of assets by the company:

 

Manufacturing equipment            

Computer equipment

Proceeds:                        

R 66 000

R20 000

Less: Base cost              

R 50 000

R20 000 (Market value)                  

Capital gain/(Loss)        

R16 000

R nil

 

1. The base cost to James when he acquired the manufacturing equipment of R50 000 is rolled over to the company under a qualifying company formation transaction; and

2. The base cost of the computer equipment is equal to the market value on the date it was acquired by a connected party. The roll-over doesn't apply because the market value of the computer was less than its base cost at the time of transfer.

For another three ways to save on CGT get your copy of the Practical Tax Loose Leaf Service today.

Until next time

Natalie Cousens
Managing Editor: Practical Tax Loose Leaf Service

 

 



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