By Jean-Louis Nel, Director – Tax
This email address is being protected from spambots. You need JavaScript enabled to view it.
A common assumption among taxpayers is that holding assets in a private company is generally more tax-efficient than holding them in a personal capacity. However, this assumption does not always hold true — particularly when the assets in question are personal-use assets.
Under the Eighth Schedule to the Income Tax Act 58 (the “ITA”) capital gains and losses on the disposal of personal-use assets are generally disregarded for capital gains tax (“CGT”) purposes. In simple terms, when an individual disposes of a personal-use asset (for example, aircraft, boat, or personal vehicle), no capital gain or loss arises — unless specifically excluded under paragraph 15 of the Eighth Schedule.
The Position Changes When the Asset is Held in a Company
This favourable treatment changes significantly when a personal-use asset is held by a private company rather than directly by an individual.
In terms of paragraph 37 of the Eighth Schedule, where an asset that would constitute a personal-use asset if owned by a natural person is instead owned by a company or trust in which a natural person holds an interest, special rules apply when that person disposes of their shares or interest.
If, at the time of disposal, the personal-use asset has decreased in value, the ITA deems the person to have disposed of their shares or interest at a market value determined as if the personal-use asset had not declined in value.
This effectively means the taxpayer cannot claim a reduced capital gain merely because a personal-use asset within the company has depreciated. The legislation neutralises any capital loss attributable to personal assets held indirectly through a company or trust.
Practical Example:
A company owns:
- Business assets valued at R200, and
- Personal-use assets (e.g., an aircraft or boat) valued at R300,
for a total asset base of R500.
A taxpayer owns 100% of the shares in the company and sells those shares for R600. The combined base cost of the underlying assets is R650.
For CGT purposes, the market value of the shares must be recalculated as if the personal-use assets had not decreased in value since acquisition. Suppose that, during the period of ownership, the personal-use assets declined in value by R70.
In terms of paragraph 37, the taxpayer’s capital gain would be computed as follows:
- Proceeds (adjusted): R600 + R70 = R670
- Less: Base cost: R650
Capital gain: R20
The result is that the notional decrease in value of personal-use assets (R70) is ignored when determining the capital gain on disposal of the shares.
Key Takeaway
Holding personal-use assets through a private company or trust can inadvertently result in adverse CGT consequences when those interests are sold. What would have been a disregarded gain or loss on individual level may instead be tax-recognised (and adjusted unfavourably) under paragraph 37 of the Eight Schedule.
This serves as a caution to taxpayers and advisors:
“A private company is not always the answer when the objective is to minimise tax — particularly where personal or mixed-use assets are involved.”