Interpreting Some Core Concepts Governing the Taxation of Capital Gains

• Jurisdiction: South Africa
• Date: 16 August 2019
• Pages: 1-18
• Published date: 16 August 2019
• Author: Gerard Swart

Articles

Interpreting Some Core Concepts Governing

the Taxation of Capital Gains

GERARD SWART*

University of South Africa

1 Introduction

Section 26A of the Income Tax Act 58 of 19621 provides for the inclusion,

in a person’s taxable income, of any taxable capital gain determined in terms

of its Eighth Schedule. The Eighth Schedule embodies a clear scheme for the

determination of a person’s taxable capital gain or assessed capital loss for

a year of assessment.2 Its point of departure is the determination of a capital

gain or capital loss in respect of the disposal of any asset of a resident and

of specif‌i ed assets of a non-resident.3 A capital gain or capital loss resulting

from such disposal is determined with reference to the proceeds in respect of

that disposal and the base cost of the asset so disposed of.4 ‘Asset’, ‘disposal’,

‘proceeds’ and ‘base cost’ are def‌i ned concepts5 which form the basic building

blocks or core concepts of the Eighth Schedule. The statutory concepts of ‘asset’

and ‘disposal’ play a crucial role in this regard, as an event is recognised as a

taxable event for purposes of the Eighth Schedule only if that event amounts to

a ‘disposal’ of an ‘asset’ as def‌i ned.

Both ‘asset’ and ‘disposal’ have been def‌i ned in very wide terms. Some

aspects of the def‌i nition of ‘asset’ bear some resemblance to the def‌i nition

of ‘asset’ originally adopted for purposes of the taxation of capital gains in

Australia.6 The dispensation originally adopted in Australia was also based on

concepts of ‘asset’ and ‘disposal’.

July Cassidy has in the light of these similarities argued7 that the South African

Legislature adopted the same prerequisites and def‌i nitions. Bob Williams also

seems to be of the view8 that the concept of an ‘asset’ was probably inf‌l uenced

by the Australian example and experience in this regard. Cassidy argues that

the same criticism may be levied at the resulting product as that to which the

1

* BCom (UP) LLB (SA) LLM (Stell), Professor of Law, School of Law, University of South Africa.

1 The ‘ITA’.

2 See pars 3 to 10 of the Eighth Schedule.

3 See par 2(1) of the Eighth Schedule.

4 See pars 3 and 4 of the Eighth Schedule.

5 See par 1 of the Eighth Schedule.

6 Section 160A of the Income Tax Assessment Act 1936 (the ‘ITAA’) as inserted in 1986.

7 July Cassidy ‘Capital Gains Tax in South Africa: Lessons from Australia?’ (2004) 16 SA Merc

LJ 164.

8 RC Williams Capital Gains Tax – A Practitioner’s Manual (2001) at 21-3.

(2005) 17 SA Merc LJ 1

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2 (2005) 17 SA Merc LJ

Australian dispensation was subjected. Her criticism is directed primarily at

the fact that ‘asset’ has been def‌i ned in terms of property. This suggests, in

her view, that the concept is limited to rights that are capable of transmission

from one person to another and that personal rights that are not capable of

transmission and valuation, do not constitute assets so def‌i ned. She also argues

that the Eighth Schedule does not adequately accommodate such rights even if

it can be argued that the concept of ‘asset’ extends to such rights. She goes so

far as to suggest that the legislation is inherently unworkable when applied to

personal rights and, in particular, rights that are not cedable. The recognition,

as assets, of personal rights created by contract implies that the conclusion

of a contract and performance in terms of it result in consecutive disposals.

This creates, in Cassidy’s view, the danger of double taxation, as the Eighth

Schedule lacks reconciling rules similar to the Australian rules preventing

double taxation. The Eighth Schedule further suffers, in her view, from a lack

of clear rules regarding the acquisition of an asset. Finally, the recognition,

as a disposal, of the creation of an asset, seems to envisage, in her opinion,

instances in which an asset is acquired by its creator rather than disposed of by

that creator to another person.9

I do not propose to analyse the differences between the rules in terms of

the Eighth Schedule and those applying in respect of the original Australian

dispensation. I contend that the concepts ‘asset’ and ‘disposal’ must be

interpreted within their context in the Eighth Schedule. They are applied

within a framework consisting of rules governing the recognition as well as

the non-recognition of certain events as disposals, the time of recognition of

some disposals, the base cost of an asset and the proceeds from its disposal, the

valuation of an asset, the limitation of some capital losses, and the deferral or

exclusion of some capital gains or capital losses. Some long-standing principles

of the ITA have also been imported into the Eighth Schedule. These rules and

principles contain various indications regarding the meaning of ‘asset’ and

‘disposal’, the concept of the creation of an asset as a disposal, and the manner

in which a disposal effected in terms of a prior contractual obligation must be

taken into account.

2 ‘Asset’ as a Def‌i ned Concept

The point of departure in interpreting any word or expression in the Eighth

Schedule is that it bears the meaning ascribed to it in s 1 of the ITA, unless the

context indicates otherwise.10 An ‘asset’ is def‌i ned, for purposes of the Eighth

Schedule, as including

‘(a) property of whatever nature, whether movable or immovable, corporeal

or incorporeal, excluding any currency, but including any coin made

mainly from gold or platinum; and

(b) a right or interest of whatever nature to or in such property’.

9 Cassidy also refers to the similar views of Williams op cit n 8 at 27.

10 Paragraph 1 of the Eighth Schedule.

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