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Never underestimate the importance of differentiating between capital and revenue when it comes to your tax liability

by , 04 September 2014
The rule of Capital Gains Tax (CGT) is your company has to make a profit or a capital gain before SARS expects you to pay tax on that money.

But what you may not know is if you can prove that money is revenue and not capital in nature affects your CGT liability.

But the question is then how does it affect it?

Let me tell you...

 

Your tax liability changes depending on whether or not the money is revenue or capital

 
So why do we need to distinguish between capital and revenue?
 
Firstly, the CGT rate is lower than the income tax rate. So correctly classifying your profit is beneficial to you and your business.
 
This is the first way differentiating between revenue and capital can affect your tax liability 
 
When it comes to CGT, there's a difference between capital and revenue. For individual taxpayers, the effective rate of CGT is 25% of their marginal rate of tax. While for companies and trusts the effective rate is 50% of the applicable tax rate. Both are far lower than the rate SARS applies to trading or revenue profits.
 
But that's not the only way differentiating between capital and revenue can affect your CGT.
 
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Here's the second way differentiating between revenue and capital affects your tax liability 

 
Secondly, SARS can ring-fence capital losses. This means it stops you from using those losses as tax deductions. 
 
But you can offset your revenue losses against your revenue earnings and capital profits. You can only offset losses of a capital nature against future capital profits. 
 
Just remember that if you receive a capital amount it won't always automatically trigger CGT
 
For CGT to come into play, it must include a profit you made on the disposal of an underlying asset.
 
There you have it. Clearly distinguishing between capital and revenue can have a huge impact on the type and amount of tax your company will pay.

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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