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Three instances when the courts will test the nature of your profit to determine your CGT liability

by , 03 September 2014
When your company makes a capital gain or a profit, you have to pay Capital Gains Tax (CGT). But this isn't always as black and white as it seems.

Depending on your intentions, the court may view your CGT liability differently.

If the court isn't sure about how to treat your profit, it may apply certain tests to see what your liabilities are.

Here are three common situations when the courts will feel the need to do this...

 

The courts will test the nature of your profit in these three situations

 
Situation #1: Shares for sale
The Income Tax Act includes provisions where the courts can automatically regard the proceeds of certain so-called 'affected shares' as being of a capital nature, provided you held them for longer than a specific period.
 
The courts will test your profit here to determine if you held the stores for the right period of time and if the profit came from 'affected-shares'.
 
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Instance #2: Conversion of a capital asset to trading stock
There are instances when selling an asset to your advantage can result in the sale proceeds changing from capital to revenue, or vice versa. 
 
Instance #3: Krugerrands
Krugerrands can be tricky! Krugerrands, like other investment coins, don't provide any income. This is unlike shares (that produce dividends), property (that produces rent), or cash and bonds (that produce interest). 
 
It's therefore difficult to justify why the courts should treat the proceeds on the sale of Kruggerrands as capital. Particularly if you base your argument on earning income, since it's obvious that you won't earn any. 
 
The other problem with Kruggerrands is, unlike many other investment coins, they have no intrinsic value - thousands of Krugerrands are minted every year. 
 
So if you make any kind of profit in these three situations, expect a letter from SARS regarding its nature.
 
There are five more situations when the courts will test your profit. Check out the Practical Tax Loose Leaf Service to find out what they are.
 

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