Capital gains tax: What you need to know

There have been talks about the introduction of capital gains tax (CGT) in Namibia for a number of years. Nothing concrete has been confirmed to date and it is expected that further research on the matter would first need to be done.

Nevertheless, here are some of the basics of CGT.

CGT is levied around the world in different manners, but in essence CGT forms part of the income tax system. CGT was introduced as far back as 1965 in the United Kingdom.

One of the disadvantages of capital gains tax is the administrative burden thereof as it involves an additional tax that is levied. The basis of the calculation can often be technical in nature, making it important to have the appropriate skills in place to enforce the legislation.

One of the basic rules of income tax is that profits made when disposing of assets are not taxable as it is seen to be capital in nature (i.e. not selling with the intention in a scheme of making a profit).

The basis of numerous court cases over the years have dealt with the intention of the taxpayer in order to determine what is capital in nature and what is not (i.e. thus subject to tax). CGT in essence takes away the subjectivity of measuring the intention of the taxpayer, and makes the treatment of capital gains more aligned and enforceable.

Bear in mind

CGT usually relates to the profit made on the disposal of assets. Bear in mind that assets are things you acquire with the following purpose:

* Using the asset to generate income (e.g. plant and machinery, delivery vehicles etc)

* Obtaining growth in the value (e.g. property, shares, rights to mine etc)

The growth in the assets is referred to as capital growth, as it represents growth in the capital you invested. Where the value of the asset increased and you sell the asset this will give rise to a capital gain. Where the value has decreased (for e.g. in the recent Steinhoff incident) you will incur a capital loss when you sell the shares.

Once a decision has been taken to dispose of asset by way of sale, donation etc, the provisions of CGT gets triggered.

A few key elements in CGT are as follows:

Proceeds: This relates to the amount that the asset was sold for. Often you will find provisions that state that where the proceeds received are less than the market value, the proceeds are deemed to be equal to the market value of the asset. This is to counter arrangements where assets are sold at low values in order to minimise tax liabilities.

Base cost: This is the cost of the asset that will be deducted from the proceeds in order to derive at the profit/loss. This is often the valuation at a certain date, or the actual cost price on acquisition of the asset.

The effective tax rate of CGT is usually lower than the normal corporate tax rate, as the full value of the capital gains are not included in taxable income.

Consider the following statement: “There is no obvious reason why a person who derives N$100 000 in interest income should be taxed differently to a person who derives N$100 000 in capital gains.”

This is the dilemma faced with CGT and the fairness thereof. The question is whether a person has in fact enjoyed the benefit of an increase in net wealth? Where this is the case, there is an argument for CGT.

There are still a number of other complex areas to be considered in CGT, for e.g. exemptions, determining base costs, roll-over relief etc.

For now, we do not have to worry too much as the introduction of capital gains tax has yet to be determined and a lot of debate on the topic will still take place.

*Johan Nel is a partner: corporate tax service at PwC Namibia. His column will be published in Market Watch bi-monthly on a Monday.