A capital gains tax hack for retirement
If you are thinking of retiring and selling your small-business assets, you may be able to benefit from the capital gains tax exclusion that is available under certain circumstances.
If you are a sole proprietor or you hold a direct interest (at least 10%) in a company or close corporation, you may be able to exclude R1.8-million of the capital gain incurred in disposing of your active business assets if the following are applicable:
You have reached the age of 55, or the disposal is due to ill health;
Your business assets (or combined business assets) do not exceed R10-million;
The value of the assets held by the company or CC in which you hold an interest do not exceed R10-million;
You have held the active business assets or interest in the company for a continuous period of at least five years prior to the disposal; and
You were substantially involved in the operations of that small business.
This is best illustrated by means of two examples.
Interest in a company or CC
Assume that 10 years ago, you bought a 50% member's interest in a CC. This cost you R1-million. The CC owns a supermarket and you have been actively involved in the supermarket business for the past decade.
When you reach the age of 55 you decide to sell your member's interest, and you receive R3-million. Your capital gains calculation will look as follows:
Sale price: R3 000 000
Less cost price (base cost): R1 000 000
Capital gain: R2 000 000
Less capital gain exclusion: R1 800 000
Net capital gain: R200 000
Depending on your other income, your capital gains tax has gone from roughly R360 000 (if the exclusion was not used) to R36 000 using the R1.8-million exclusion.
This is presuming, however, that the member's interest sold comprises active business assets.
You run a supermarket business as a sole proprietorship and you own the property where the supermarket operates. This building was purchased six years ago and you have been involved in running the supermarket since then. You bought the building for R500 000 and it is being sold as part of the supermarket assets for R3-million. You have also built up substantial goodwill in the business. Your capital gain calculation will look like this:
Sale price of building: R3 000 000
Less purchase price of building (base cost): R500 000
Capital gain on building: R2 500 000
Plus, value of goodwill forming part of sale: R500 000
Capital gain: R3 000 000
Less exclusion: R1 800 000
Net capital gain: R1 200 000
Your capital gains tax would have been (depending on other income) roughly R540000 without the exclusion and roughly R216000 with the exclusion.
Note that the R1.8-million exclusion is cumulative over your lifetime and may only be used if you are over 55. In other words, if you sell business assets at the age of 55 and use up the R1.8-million exclusion, no further exclusion will be available to you upon sale of your other small-business assets. Also, if you have a sole proprietorship with assets of R6-million and have an interest in a company with assets of R5-million, then you will not be entitled to this exclusion.
• Baines is a legal adviser and tax consultant at PW Harvey & Co