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Can I offset my R1.5m assessed capital loss with Sars?

What can I do to maximise the utilisation of this tax vehicle?
Picture: Moneyweb

I have a R1.5 million assessed capital loss with Sars. What can I do to maximise the utilisation of this tax vehicle? I am fairly close to retirement age and am a South African citizen.

There is no mechanism in the Income Tax Act for setting off an assessed capital loss against ordinary income of a revenue nature. An assessed capital loss, therefore, neither decreases a person’s taxable income nor increases a person’s assessed loss of a revenue nature. Such an assessed capital loss is consequently ring-fenced and can be set off only against capital gains.

Schedule Eight of the Income Tax Act is not specific on time periods. Paragraph 8 and 9 states that an assessed capital loss brought forward from the previous year of assessment is taken into account in arriving at the net capital gain (para 8) or assessed capital loss (para 9) for the current year of assessment. An assessed capital loss for the current year of assessment is carried forward to the next year of assessment.

We can thus assume that capital losses can be carried forward into the next financial year in perpetuity until it is offset by a gain. The loss cannot be carried over every year in its entirety; the loss will be reduced by the annual exemption, currently R40 000, yearly. The Act is silent when it comes to time periods for which it can be carried forward; therefore we can assume that there is no period until proven differently.

Losses realised on an investment can be offset against a gain realised on the disposal of another asset, this includes a property. The sale of different types of assets can be played off against each other.

Therefore it will make sense to sell an asset where a significant capital gain has arisen, even if you had no intention of selling the asset in your lifetime. Since death is a capital gains tax incident, it might make sense purely from this perspective to realise assets, to reduce your estate tax liability.

With property, it might not be that easy, but with an asset like shares, or unit trusts, it might be something to consider. There are rules about time periods of holding shares. If held less than three years the capital gain from a sale might attract ordinary income tax and might be regarded as trading profits, but longer than this and it will be automatically be seen as capital gains and taxed as such.

Most investors on the JSE with a diversified portfolio have made tremendous gains on share like Naspers over the past few years. It is possible to now have an overweight position, which in itself is always risky. The exposure can be trimmed and the capital gain set off against the assessed loss. This is an excellent opportunity to diversify a share portfolio further. Alternatively, if you feel that you still want the exposure to Naspers, you might consider buying Tencent in an offshore share portfolio.

The same goes for holdings in companies like British American Tobacco (BAT), where many South African long-term investors have overweight positions. This is a very popular share to hold, and if you still want the exposure, instead buy Reinet for instance, which has substantial exposure to BAT.

The same goes for many other companies, even inside a specific industry another company can be bought that will move in the same direction as the company being sold. If you have exposure to a unit trust that is in a capital gain, consider selling units, and buying a similar unit trust. For example, if you have the Allan Gray Balanced Fund, it can be switched to something like the Investec Balanced Fund, or even more than one fund for diversification purposes.

Capital gains tax is becoming an increasing problem, since our relatively high rate of inflation contributes to the increased value of assets like property. For the first few years after capital gains were introduced in 2001, it was not a significant problem, but as time passes the value of properties increases exponentially. Of course, capital gains are not a problem if you have no intention to sell, but if an asset is held in your name, it will automatically be taxed at your death.

If you are close to retirement and have only so-called ‘risky’ assets like shares and property, it might also be an excellent time to utilise the assessed loss and sell some of these assets to buy income-producing assets. The extent to which such a plan should be implemented will depend on your current asset allocation and income needs. A registered financial advisor will be able to do such a calculation.

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Am I understanding correctly when I think that, with a loss making share such as Steinhof, if I hold onto it for 3 years and sell it then, it becomes a capital loss vs a revenue loss if i sell it now? Then i could offset other share capital gains against it?

Makes sense. But I’m wondering that if you have a revenue loss can you offset it against your income? Because then you could technically have a larger taxable benefit now at the highest marginal tax rates?

Dear JapieM,

It comes down to your intention why you held the shares in the first place. Then, it MIGHT be seen as an income, not definitively. Lastly, your intention with shares would normally be with a long term term view, therefore it will be seen in a capital nature and not to earn an income.

“sale might attract ordinary income tax”, with the emphasis on MIGHT: Depending on your intention. If you are a long-term investor in general, and you sell your Steinhoff shares (kept shorter than 3 years) with the intention of protecting your capital from further losses, it will be considered capital of nature. If you initially bought the share to generate long term capital profits, and new information indicate that the company is not what you thought it to be, and you are convinced that the share will fall, there is no way SARS will consider it revenue of nature. Even if you had the share for only one day. However, the onus could be on you to convince SARS!

“The loss cannot be carried over every year in its entirety; the loss will be reduced by the annual exemption, currently R 40 000, yearly” – I don’t believe this remark is accurate. The prior year assessed capital loss is deducted after the annual exclusion. For this reason, the assessed capital loss will roll forward in its entirety until a net capital gain is made.

If you invested in an asset like a new Mercedes Benz for say R1 000 000 and after 5 years sold it and made a capital loss of say R700 000 as it now sells for R300 000 could you claim this capital loss against other capital gains?

Unfortunately not, as this asset will be a personal use asset. Any gain/loss from the sale of a personal use asset should be disregarded.

I can invest R500 000 tax free. Why should I invest that with funds and accounts where the interest is not good? I can put R500 000 into bitcoin and the gains trading or capital is tax free. If not I put a big ? behind SARS intentions to make the conventional banks and funds rich. I can use bitcoin as my retirement fund.

Amelia’s answer to the submitted question contains a serious error.

“The loss cannot be carried over every year in its entirety; the loss will be reduced by the annual exemption, currently R40 000, yearly.” is simply not true (as Tertius also pointed out).

What she’s saying is that for example, if you have an assessed capital loss carried forward of say R400 000 and for 10 years you have no yearly capital gains or losses, then your capital loss carried forward is reduced by R40 000 every year and after 10 years it’s all gone. THIS IS WRONG. After 10 years you still have a capital loss of R400 000 to offset against future capital gains.

The annual exclusion of R40 000 is first deducted from the current year’s capital gains of losses and only after that any capital loss carried forward from the previous year is deducted.

You know, I’m not here to insult people, but every time I read an article by Amelia it contains some or other serious error. Has she been advising her clients since 2001 (when capital gains tax came into effect) that this is the way assessed capital losses work?

And has she been helping her clients since 2001 to make tax efficient investment decisions based on her erroneous interpretation of tax legislation?

Maybe Moneyweb should screen their contributors a little more carefully?

How many Financial advisors truly know their job. For example the financial advisor i spoke to at Standard Bank was constantly giving me wrong information about taxes etc. Then when i just asked for a simple investment and looked at the commission charges on a simple FIXED deposit there I saw she would earn R20 000 commission which she never disclosed at all during our meeting. Imagine paying R20K of commission to a person advising you who you have to constantly correct? Then of your CAPITAL investment they will get R20K? Another case is a company called NIFLAS who took R130million pensioners monies and used some of the funds to finance a sisters Creche business. These financial advisors are now working to advise clients on Discovery Medical Aid products. The judge hearing the NIFLAS case and looking at their operation said they were investing peoples money so badly its like giving a R1000 loan to a gardener expecting him to return you 20% returns per month on a R1000.

If I have an investment in say Allan Gray Balanced fund and I can sell for a capital gain can I then say after a week re-invest in the same Allan Gray Balanced Fund. Having made a capital gain of say R40 000 I would then that reset the base date for that amount re-invested ?

End of comments.

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