Capital Gains Tax for the business on the street
Capital gains tax (CGT) has been around since October 2001 and bookkeepers are still confused about what transactions are CGT events and what transactions are in the course of running the business. CGT is the tax levied on the disposal of an asset that is held for long term purposes or that is not speculated with. This means that when a motor vehicle is sold, the profit or loss that is calculated is not taxed at the normal income tax rate of 28% but the profit is included in the taxable calculation at a rate of 66.66%.
Let’s break the CGT definition down:
Disposal = the sale or actions of letting an asset go out of your hands. Examples of disposal: sold, given away, scrapped, exchanged, lost, destroyed or when it is redeemed or cancelled.
Asset = property, immovable or movable (excluding cash or money), including coins made from gold or silver or the right or interest in such property.
Long term/not speculation purposes = the assets are not used in the business as part of its operations, but is held for long term purposes.
Things bookkeepers should look out for when capturing a transaction:
– If monies received are a high amount don’t just assume this is from normal sales! Enquire as to what this was for. If it was received for the selling of a capital asset i.e. PPE, then the book value should be deducted off the amount received and the net profit/loss should be accounted for in the Income statement (i.e. statement of profit and loss) as a “profit/loss from selling PPE”
– If monies were received from an insurance company for an asset that was stolen or in an accident and written off, this is also a disposal in terms of the Income tax act and the difference between the book value and the monies received should also be accounted for in the Income statement and “profit/loss on theft of an asset”
– If monies are paid out for the purchase of shareholders’ shares, most likely this is a re-purchase of shares by the existing shareholders and is not a capital gains event. The CGT is payable to the shareholder that sold his/her shares and not to the business. The only entry for this transaction should be to debit the existing remaining shareholders loan account and to credit the bank.
Selling of PPE is disclosed separately on the financial statements as well as in a note that breaks down the additions and disposals during the financial year. It is important as the bookkeeper to ensure that the fixed asset register is always kept up to date and that all additions and disposals are recorded in the financial records and fixed asset register. This will assist when calculating the income tax return as well as preparation of the financial statements.
Journal entries for disposal of an asset
DT Profit or loss of asset
CR Cost of asset
Remove the asset out of the asset account in the balance sheet and transfer the cost to the Income statement
DT Accumulated depreciation of asset
CR Profit or loss of asset
Remove the accumulated depreciation of the specific asset out of the balance sheet and transfer it to the Income statement. The net effect will then be the book value accounted for in the Income statement
DT Bank/Current asset
CR Profit or loss of asset
Account for the monies received for the sale of the asset in the Income statement. The net effect will either be a profit, if the monies received are higher than the book value, or a loss, if the monies received are less than the book value.
Remember to indicate on the fixed asset register that the specific asset was sold. Do not delete the asset completely of the fixed asset register. Your fixed asset register is a register of all assets since inception of the business.
The net profit recorded in the Income statement will be included now in the normal income tax calculation at an inclusion rate of 66.66%. This means that capital gains will effectively be taxed at 18.66%. So, it is important to exclude capital gains transactions from normal transactions to ensure the entity enjoys the lower tax on the capital profits.
Capital losses are rolled over to the following year and utilised against future capital profits. It is important though to indicate these capital losses on the income tax return so that the entity can utilise these capital losses in the future.