[FAQ] Capital gains tax where payment is received in instalments

[FAQ] Capital gains tax where payment is received in instalments

• 12 April 2021
• Capital Gains Tax
• Piet Nel

This article is based on tax law for the year ending 28 February 2021.

Background

A taxpayer resigned as a beneficiary of a trust, and as part of the agreement, “sold” her use of the property and business owned by the trust (that she managed and 'owned'). The purchaser is repaying her R14million over 20 years in monthly instalments. No interest is due on the payment.

How would the taxpayer calculate the capital gains tax based on this agreement? Is the taxpayer expected to declare the full R14 million gain in her 2021 tax return, and pay the full capital gains tax on that or can she declare the amounts received in each tax year as a capital gain? Are there any other factors that the taxpayer should consider?

Answer

The Income Tax Act

From the facts provided it is clear that the beneficiary sold her vested or contingent right in the trust assets and that the trust deed was changed to remove her as a beneficiary and add the purchaser as a new beneficiary. Whilst not relevant to your request, it is accepted that the trust didn’t terminate when this transaction was done.

The law relevant to the time of disposal, of an asset not held as trading stock, is found in paragraph 13(1) of the Eighth Schedule to the Income Tax Act. It reads as follows:

“The time of disposal of an asset by means of a change of ownership effected or to be effected from one person to another because of an event, act, forbearance or by the operation of law is, in the case of—

• an agreement subject to a suspensive condition, the date on which the condition is satisfied;
• any agreement which is not subject to a suspensive condition, the date on which the agreement is concluded;”

From the facts provided it does not appear that the contract is subject to a suspensive condition. Judge Wallis, in the recent CSARS v Bosch, said: “A suspensive condition is one that suspends the exigible content of a contract, either in whole or in part, pending the occurrence of an uncertain future event.” Payment terms is not a suspensive condition, more likely a resolutive condition.

The full amount agreed on as the sale price is therefore proceeds on the transaction date. The base cost to the beneficiary depends on whether she had a vested right to the assets in the trust – see paragraph 81 of the Eighth Schedule.

Webinar Commentary

Further webinar commentary on Capital Gains Tax Series can be accessed here.

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