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.