Capital Gains Tax - Loss

Category: 
Compliance
Question: 

To Whom it may concern,I have a client who bought property form R1.5 mil and recently sold it for R500 000, according to me the capital gains loss will be in the future offset against the gain, is there another possible way to recoup the loss and also the interest paid on the bond?

Answer: 

 Be advised that not sufficient information is provided. We do not know for example, if the client is an individual or a company, purposes and use of property, and whether the property was sold to a connected party.  These facts have a bearing on the tax outcome.

You are reminded that generally, an assessed capital loss for the current year of assessment is carried forward to the next year of assessment. There is no procedure or sections in the in the Income Tax Act that would permit the setting off an assessed capital loss against ordinary taxable income.

An assessed capital loss, therefore, does not decrease taxable income and does not increase assessed loss of a revenue nature. Capital loss is ring-fenced and can only be set off against capital gains arising during future years of assessment.

With reference to interest paid on the bond, you are reminded that certain costs could be part of the base cost if the asset – property in this situation – is used wholly and exclusively for business purposes. In addition, you are reminded that the cost cannot be added to the base cost of the property if the cost was claimed as deduction for normal income tax purposes.

With reference to connected party, the losses could be disregarded, if the property was sold to a connected party. The relevant clause is Para 39 of the 8th Schedule. Certain losses on sale of the disposal of assets to a connected person are disallowed. The loss must be disregarded in the determination of the disposer’s aggregate capital gain or aggregate capital loss. This clause is known as the `clogged loss ‘rule.

The `loss’ may become unclogged’ or set off against gains made on assets  disposed by the same connected parties  during the same year or later years  of assessment in which the capital loss was made.

I trust that this response is helpful.

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