LML4804 Income Tax assignment 03.

NAME: EMMANUEL NYATI STUDENT NUMBER: MODULE: LML4804 ASSIGNMENT: 03 UNIQUE NUMBER: Question 1 The question to be answered in the set of facts given is whether Bob will be liable for Capital Gains Tax (hereinafter referred to as CGT). Another question is whether Bob‟s plan to immigrate to Ireland has an effect on Bob‟s liability for CGT. CGT became a part of South African law on 1 October 2001. It is not a separate tax but is included in the Income Tax Act1 . It governs the tax implications that ensue upon the disposal of an asset. When such disposal occurs there could either be a capital gain or an assessed capital loss. Section 26A of the Income Tax Act includes taxable capital gains into taxable income. The eighth schedule of the Income Tax Act then provides for how the tax consequences of assets are determined. As a rule, if an amount or proceed has been taken into account for normal tax under gross profit it is excluded in the determination of CGT and in the same vein expenditure allowed for normal tax is not incorporated in the calculation of CGT.2 The eighth schedule stipulates that persons rather than taxpayers are liable for CGT. This effectively means everyone is subject to the CGT rules regardless of whether the person is chargeable and required by the Income Tax Act to file a return or not. Therefore the rules for CGT also bind Bob. Since CGT is included in the Income Tax Act, the amount taxable ultimately has to be included in a person‟s taxable income. Before that can occur, the taxable capital gain or loss has to be determined separately. In the determination of determining a capital gain or loss the following are important: assets, disposal, proceeds and base cost. The basic formula for the calculation of CGT is: Proceeds less Base cost = Capital gain/loss.3 Another factor that affects this case is what system, viz residence or non-residence applies for the CGT to be applicable. South Africa uses a residence-based tax system which sees residents being taxed on their world-wide income and the same principle applies with CGT. 4 It follows that Bob will be taxed based on the residencebased tax system because he is a South African resident. In any case, had he