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Capital Gains Tax in relation to Instalment Sales

Disposals - the meaning of 'disposal'

Silke on South African Income Tax in Chapter 24, Capital gains defines “Disposal” in respect of Capital Gain:

“A capital gain is made, or a capital loss is incurred, when proceeds or deemed proceeds arise on the disposal or deemed disposal of an asset. The statutory definition of the term ‘disposal’ is extremely wide and extends well beyond its ordinary and natural meaning. For convenience, it may be divided into three parts: the general definition (para 11(1)), the extended definition in terms of which certain events are deemed to constitute the disposal of an asset (para 11(1)(a) to (g)), and finally, the excluding part in terms of which certain specific events are not regarded as a disposal of an asset by virtue of para 11(2).”

  1. Asset’ is defined in the widest of terms. The definition includes:

    1. property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any currency,  but including any coin made mainly from gold or platinum; and

    2. a right or interest of whatever nature to or in such property2a  (definition of an ‘asset’ in para 1).

  2. The term ‘property’ is not defined, except by the phrase ‘of whatever nature . . . corporeal or incorporeal’,  thus also relating to proprietary rights. The Eighth Schedule has a wide ambit, and does not require that the property must be transferable or constitute a vested right. Subsequently, the term ‘property’ represents all rights vested in a person which have an economic value. Such rights certainly mean to include rights of ownership in immovable property.

  3. Proceeds’ is defined as the amount received or accrued in consequence of a disposal.

  4. The general definition of a ‘disposal’ is “any event, act, forbearance or operation of law that results in the creation, variation, transfer or extinction of an asset”. Generally speaking, an asset is disposed of whenever there is a change in ownership, whether voluntary or involuntary, of the asset The term ‘disposal’ also includes:

    1. The sale, donation, expropriation, conversion, grant, cession, exchange or any other alienation or transfer of ownership of an asset (para 11(1)(a)).

    2. The forfeiture, termination, redemption, cancellation, surrender, discharge, relinquishment, release, waiver, renunciation, expiry or abandonment of an asset  (para 11(1)(b)).

    3. The scrapping, loss or destruction of an asset (para 11(1)(c)).

    4. The vesting of an interest in a trust asset in a beneficiary (para 11(1)(d)).

    5. The distribution of an asset by a company to a shareholder (para 11(1)(e)).

    6. The granting, renewal, extension or exercising of an option (para 11(1)(f)).

    7. The decrease in value of a person’s interest in a company, trust or partnership as a result of a ‘value shifting arrangement’ (para 11(1)(g)).

  5. The word ‘forbearance’, which defined in the general definition, is not statutorily defined, but The Collins Dictionary defines it as “Abstention from or postponement of the enforcement of a legal right, esp by a creditor allowing his debtor time to pay.” The ordinary meaning of ‘forbearance’ means an intentional delay in the enforcement of something which is due and payable, such as collecting a debt or demanding performance on a contract, for a specific period of time.

  6. Examples of the ‘creation’ of an asset that would constitute a disposal are the granting of a lease, servitude, mineral right, or an option. For example, where a person grants a servitude over his property or disposes of the mineral rights in the property, he would be creating an asset for the acquirer, which amounts to a part-disposal of the property. In other words, the ‘creation’ of the right (the alienation of one of the rights of ownership) constitutes both an acquisition and a disposal.

  7. The word ‘variation’, explains the SARS CGT Guide, must be interpreted in the context of disposal, the underlying principle being that a person must have disposed of an asset in the sense of having parted with the whole or portion. It is possible to alienate certain of property rights whilst retaining others. The general rule is that each of the distinct and severable legal rights to or in property constitutes an ‘asset’ in its own right. Thus, if the owner of land grants a servitude over the land whilst retaining all other rights of ownership, this undoubtedly amounts to a ‘disposal’ in that certain rights in respect of the land have been alienated.

  8. The acquisition of legal title to an asset by a person who previously held no such title would, it is submitted, constitute a ‘disposal’, as defined, being an example par excellence of the ‘creation’ of an asset as envisaged in para 11(1) – the asset in question being the newly-acquired bundle of legal rights comprising ownership. By contrast, the acquisition of mere possession of an asset would not, it is submitted, constitute a disposal until such possession ripens into ownership.

  9. Time of disposal

    Specific rules apply in determining the time of disposal. It is generally seen as the date of change in ownership or the date of extinction of the asset. In the case of an agreement subject to a suspensive condition, it is the date on which the condition is satisfied and where there is no suspensive condition, the date on which the agreement is concluded.

  10. Ownership’, is defined in the Deeds Registry Act 47 of 1937:

    1. Section 16:   How real rights shall be transferred.—Save as otherwise provided in this Act or in any other law the ownership of land may be conveyed from one person to another only by means of a deed of transfer executed or attested by the registrar, and other real rights in land may be conveyed from one person to another only by means of a deed of cession attested by a notary public and registered by the registrar: Provided that notarial attestation shall not be necessary in respect of the conveyance of real rights acquired under a mortgage bond: …”;

    2. Section 33:   Registration of title by other than the ordinary procedure.—(1)  Any person who has acquired in any manner, other than by expropriation, the right to the ownership of immovable property registered in the name of any other person and who is unable to procure registration thereof in his name in the usual manner and according to the sequence of the successive transactions in pursuance of which the right to the ownership of such property has devolved upon him, may apply to the court by petition for an order authorizing the registration in his name of such property.”;

    3. Section 63:   Restriction on registration of rights in immovable property.—(1)  No deed, or condition in a deed, purporting to create or embodying any personal right, and no condition which does not restrict the exercise of any right of ownership in respect of immovable property, shall be capable of registration: Provided that a deed containing such a condition as aforesaid may be registered if, in the opinion of the registrar, such condition is complementary or otherwise ancillary to a registrable condition or right contained or conferred in such deed.”

    Ownership’ is, subsequently, only acquired, bestowed upon and proved by registration of Land in the name of a person.

  11. Chapter II of the Alienation of Land Act, 68 of 1981 (“ALA”):

    1. Section 1:

      1. alienate”, in relation to land, means sell, exchange or donate, irrespective of whether such sale, exchange or donation is subject to a suspensive or resolutive condition, and “alienation” has a corresponding meaning

      2. contract”—

        1. means a deed of alienation under which land is sold against payment by the purchaser to, or to any person on behalf of, the seller of an amount of money in more than two instalments over a period exceeding one year;

        2. includes any agreement or agreements which together have the same import, whatever form the agreement or agreements may take;

      3. owner”, in relation to land, means the person in whose name that land is registered in the deeds office concerned, and also any successor in title of such person;

    2. Sections 6 & 18 of the Alienation of Land Act, read with the definitions above and the provisions of the Deeds registry Act, make it abundantly clear that:

      1. The ALA is the sale of land, conditional upon the payment of the purchase price in more than two instalments over a period exceeding one year. Transfer of the asset shall only take place after payment of the full purchase price, interest, costs and fees;

      2. Transfer of the asset, change in ownership and ultimate disposal take place upon payment of the full purchase price, interest, costs & fees and registration of the land in the name of the purchaser;

      3. The sale of land, being an asset as defined, shall become an ultimate disposal and be completed only upon registration thereof in the name of the purchaser;

      4. The proceeds shall only be received upon payment of the full purchase price, interest, costs & fees or accrued as and when each and every instalment becomes due and payable.

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