Interpretation Note 44 (Issue 3) – Public Benefit Organisations: Capital Gains Tax

Interpretation Note 44 (Issue 3) – Public Benefit Organisations: Capital Gains Tax

• 21 February 2020
• Corporate Tax
• SARS

Purpose
This Interpretation Note provides guidance on the application and interpretation of paragraph 63A which deals with the disregarding of a capital gain or capital loss on the disposal of an asset by a PBO and must be read with Interpretation Note 24 “Income Tax: Public Benefit Organisations: Trading Rules – Partial Taxation of Trading Receipts”.

Background
PBOs became subject to a system of partial taxation with effect from years of assessment commencing on or after 1 April 2006. Under this system a PBO conducting trading activities falling outside the parameters of the prescribed exemptions in section 10(1)(cN), is taxable on receipts and accruals from those activities but retains exemption for its PBAs.

For earlier years of assessment PBOs, once approved under section 30, were generally fully exempt from normal tax on their receipts and accruals and taxable capital gains, regardless of the source from which they were derived. The two key provisions giving effect to the system of partial taxation are section 10(1)(cN) and paragraph 63A (capital gains and capital losses). For more information on the background to CGT and PBOs before the insertion of paragraph 63A, see issue 1 of this Note which can be found on the SARS website under Legal Counsel / Legal Counsel Archive / Interpretation Notes.

Any capital gain or capital loss made on the disposal of an asset, substantially the whole of which has not been used in the carrying on of a PBA, must be taken into account for CGT purposes.

The law
Section 10 and the paragraphs of the Eighth Schedule are quoted in the Annexure.

Meaning of “substantially the whole”
In the strict sense the expression “substantially the whole” is regarded by SARS to mean 90% or more. However, since PBOs operate in an uncertain environment making proper planning difficult, SARS will accept a percentage of not less than 85%. See Binding General Ruling (Income Tax) 20 “Interpretation of the Expression ‘Substantially the Whole’ ”.
The percentage usage is determined using a method appropriate to the circumstances which may be based either on time or area.

Application of the law

Valuation date
The valuation date of a person who ceases to be an exempt person under paragraph 63, is the date on which that person ceases to be an exempt person.
Since all PBOs fall outside paragraph 63 with effect from the introduction of partial taxation of PBOs, the valuation date of PBOs in existence on 1 April 2006 will be the first day of their first year of assessment commencing on or after 1 April 2006. For example, a PBO with a financial year ending on 31 March will have a valuation date of 1 April 2006, which is the commencement of its 2007 year of assessment.
The valuation date value of a pre-valuation date asset forms part of the base cost of that asset and ensures that any pre-valuation date growth or decline in value is disregarded for CGT purposes.

Base cost
The following methods of determining the base cost of an asset on valuation date are available:

• The market value of the asset on valuation date.
• Twenty per cent (20%) of the proceeds from the disposal of the asset, after first deducting from the proceeds an amount equal to the expenditure allowable as part of the base cost incurred on or after valuation date.
• The time-apportionment base cost of an asset.
• The weighted-average method. This method is available only for the four categories of identical assets listed in paragraph 32(3A). These methods are unlikely to be of much relevance to a PBO in view of the disregarding of capital gains and losses on such assets under paragraph 63A(a) discussed in 5.3.1.

This article first appeared on sars.gov.za.

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