How do you calculate the base cost for capital gains tax?

When you want to declare a capital gain for tax purposes or work out how much capital gains tax (CGT) you will be liable for, you need to determine the base cost.

The base cost is the cost of acquiring the asset. You need to deduct it from the proceeds of selling or disposing of the asset to determine the capital gain.

The proceeds are what you receive when you sell the asset or the asset’s market value when you may not have received proceeds for it but were deemed to have disposed of it – for example, when you die or emigrate.

If the asset is property, the base cost includes the cost of any improvements you make to it at any stage. Improvements, however, do not include maintenance.  You can improve a property by adding a room, a wall around the property, a garage or a pool, but painting it or repairing a broken garden wall is maintenance.

What you can include in the base cost

The base cost of an asset can include:

• The cost of acquiring or buying the asset;
  
  
• The transfer costs;
  
  
• Taxes paid, such as transfer duty on property or securities transfer tax on shares;
  
  
• The cost of advertising for a buyer or seller;
  
  
• The cost of moving an asset from one location to another;
  
  
• Installation costs;
  
  
• Improvements;
  
  
• The cost of an option used to acquire an asset such as a share;
  
  
• The cost of establishing or maintaining the legal title or right to own an asset;
  
  
• The value added tax (VAT) if the VAT is not claimed as an input tax credit; and
  
  
• The cost of borrowing to acquire listed shares, but not the cost of borrowing to buy property.

These costs are known as allowable costs. Note that if an expense has been, or will be, taken into account in determining taxable income, generally it will not form part of an asset’s base costs.

What is excluded from the base cost

The base cost will exclude the following, for example:

• Borrowing costs;
  
  
• The costs of raising capital;
  
  
• Bond registration and cancellation fees; and

Pre- or post the implementation of CGT

When you determine the base cost of an asset you acquired after the implementation of CGT on 1 October 2001, the base cost is the allowable costs you incurred to acquire or create it.

If you acquired the asset before CGT was implemented on 1 October 2001, your calculation of the base cost is more complex. The base cost is a value determined as at 1 October 2001 (the valuation date) and any allowed costs that you can include in the base cost incurred on or after 1 October 2001.

There are three methods to determine the value on 1 October 2001:

1.  20% of the proceeds

You can use 20% of the proceeds of the sale of the asset and deduct any of the allowed costs incurred on or after 1 October 2001.

2.  The market value

You can use the market value of the asset on 1 October 2001. In the case of immovable property you will need a valuation certificate that was drawn up before 30 September 2004. The market values of South African shares and collective investment schemes on 1 October 2001 were published in the Government Gazette at the time and can be found on the South African Revenue Services website here.

3.  The time-apportionment method

You can use the time-apportionment method that apportions the gain between the period you owned the asset before CGT was introduced and after it was introduced. If, for example, you held an asset for 10 years before CGT was introduced and 20 years after it was introduced, one-third (10 out of 30 years) of the gain must be added to the original cost to determine the base cost.

The formula you need to use to calculate the base cost is:

Allowable costs pre 1 Oct 2001 + ((Proceeds – Allowable costs pre 1 Oct 2001) × number of years held before 1 Oct 2001)   /  Total number of years held)

The rules for which method you should use are:

• If you can’t determine the allowed costs for the asset before 1 October 2001, you can only use method 1 or 2 to determine that base cost at 1 October 2001.
  
  
• If the proceeds of the sale of an asset are greater than the expenditure that you can take into account in determining the base cost both before and after 1 October 2001, any of the three methods can be used. However, in the case of the first method, if the proceeds are less than the market value but greater than the allowable costs, the value on 1 October 2001, must be changed to equal the proceeds less the allowable costs after 1 October 2001. In other words, the result of using this method can never be a capital loss.
  
  
• If the expenditure that you can take into account in determining the base cost both before and after 1 October 2001 is greater than the proceeds, the following rules apply:
  
  
• Where the 1 October 2001 market value was determined or published, and the market value and proceeds are both less than the expenditure that can be used to determine the base cost of the asset up until 1 October 2001, the valuation date value is the higher of:
  • The 1 October 2001 market value, or
  • The proceeds from the sale of the asset less allowable costs that can be used to determine the base cost of the asset post 1 October 2001.
    
    
• Where the market value at 1 October 2001 or proceeds are greater that the allowable costs before 1 October 2001, the valuation date value is the lower of:

- The 1 October 2001 market value, or

- The time apportionment base cost.

• Otherwise, if market value at 1 October 2001 has not been determined, the valuation date value must be determined using the time apportionment basis.