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[FAQ] Capital Gains Tax on the sale of shares where the company has accumulated losses
- 12 August 2021
- Capital Gains Tax
- The Tax Faculty Tax Specialist
This article is based on tax law for the year ending 28 February 2021.
Background
A taxpayer is a director who wants to sell her shares to the remaining directors. The shares have a nominal value of R100 each. The net asset value of the company is negative (liabilities exceed assets) and the price per earnings ratio is negative. The company has been running at a loss for several years. The director does not want to make any profit from the sale of her shares.
How will SARS value the shares for capital gains tax (CGT) if the above 2 calculations for valuation are negative? Will it be considered a capital loss?
Answer
The Income Tax Act
Based on the evident lack of value in the company, a low value for the shares would be acceptable to SARS, although SARS might ask for supporting documents to substantiate the valuation. Although your enquiry goes no further, I enquire whether you are aware of the implications for the shareholder. Because she is disposing of her shares to the other directors and not to the company, we need to consider her relationship with them to determine whether they are connected persons in relation to each other. For this we need to consider the definition of “connected person” in section 1(1) of the Income Tax Act insofar as it relates to natural persons (I assume all the shareholder are natural persons).
Relevant tax law
“’connected person’ means-…(a) in relation to a natural person- (i) any relative; and (ii) any trust (other than a portfolio of a collective investment scheme) of which such natural person or such relative is a beneficiary”.
If your client is a connected person in relation to any of the other shareholders, the loss she sustains in the disposal of her shares to any of those connected shareholders will be disregarded in terms of paragraph 39 of the Eighth Schedule to the Act.
“Par 39: (1) A person must, when determining the aggregate capital gain or aggregate capital loss of that person, disregard any capital loss determined in respect of the disposal of an asset to any person-
(a) who was a connected person in relation to that person immediately before that disposal…
(2) A person’s capital loss which is disregarded in terms of subparagraph (1) may be deducted from that person’s capital gains determined in respect of disposal of assets during that year or subsequent years to the same person to whom the disposal giving rise to that capital loss was made, if at the time of those subsequent disposals, that person is still a connected person in relation to that person”.
If your client is not a connected person in relation to any of the other shareholders, she will be able to claim the capital loss she sustains on disposal of her shares.
Webinar Commentary
Refer to the following webinar: Tax Dispute Resolution Series – All You Need to Know here.