IFRS - there's nowhere to hide - Grant Thornton

6 Volume 2. November 2005
Although not specifically mentioned, don't forget that there are some exclusions
from CGT where business assets are disposed of by natural persons.
CGT implications
The portion subject to STC will be the difference between the
The sale of a business implies the sale of a group of assets and proceeds arising from the disposal of capital assets and their
liabilities comprising the business. To the extent that a business is market value at 1 October 2001.Unlike the CGT provisions there
worth more than its net assets, an intangible asset in the form of is no requirement that this valuation must be done prior to 30
goodwill arises. (For the purpose of this illustration we will
September 2004 or that any valuation had to have been
assume that the assets other than goodwill are sold at cost and submitted. From a tax-planning perspective it may be worthwhile
therefore no gain or loss is realised on these assets).
to value the assets now as, the further you get from the valuation
date, the more difficult it is to source accurate data on which to
The disposal of goodwill amounts to the disposal of an asset and base a valuation.
is also subject to Capital Gains Tax. Once again, from a tax
planning perspective, maximising the base cost of goodwill
reduces your capital gain.
Avoiding additional STC
In addition, to ensure that at least the pre 1 October 2001 capital
There are some pitfalls surrounding the determination of the growth is not subject to STC, steps need to be taken to have the
valuation date value of goodwill. It is SARS' view that the Time company liquidated or deregistered within 6 months (the Income
Apportionment Base Cost (TABC) method is not available for Tax Act prescribes these steps).
determining the base cost of goodwill (although, in our view, this
is debatable). Because goodwill is an intangible asset, a valuation Assuming that the business is sold the calculation of the tax
certificate needs to be submitted if its value thereof at valuation liability will be as follows:
date exceeds R1m (not R10m as is the case of tangible assets).
Remember that a business is not considered to be a separate asset
for CGT purposes and therefore the valuation of the business as
a whole may be inadequate. Because the taxpayer in this case is
the company, the capital gain will be taxed at an effective rate of
14.5% (as opposed to 10% in the case of a natural person).
Proceeds on sale of goodwill *
Base cost on sale of goodwill
Capital gain
Portion included in taxable income (50%)
Taxed at 29%
R
15 000 000.00
(5 000 000.00)
10 000 000.00
5 000 000.00
1 450 000.00
STC implications
* remember the other assets are sold at their base so no CGT arises. If the
Generally, STC is imposed on the net dividend declared by a
company at a rate of 12.5%. Therefore, assuming that the
company has no revenue reserves at the date of sale and the full
proceeds arising from the sale of the business are distributed to
shareholders, the full amount will be subject to STC at a rate of
12.5%.
In the past it was possible for a company to distribute capital
profits STC free if the distribution was made in the course of, or
in anticipation of, the liquidation or deregistration of the
company. With the introduction of CGT, only that portion of
the capital profits that represent capital growth that occurred
prior to valuation date will be exempt from STC under these
circumstances (i.e. liquidation or deregistration).
company subsequently deregisters/liquidates STC:
R
Total capital profit subject to STC 10 000 000.00
Less CGT paid (1 450 000.00)
Capital profits available for distribution 8 550 000.00
STC @12.5% 1 068 750.00
Total tax (CGT&STC) 2 518 750.00
There are some important actions that can be taken to limit the
CGT and STC costs of selling your business. For the reasons set
out above it is generally always better to sell your shares rather
than the business (the difference in our example is R1 519 750).
These costs should be considered when negotiating with a
potential purchaser.