Capital gains tax : a base cost and valuation appraisal.

Abstract

This study investigates the implications of the introduction of Capital Gains Tax that came into effect on the 1st October 2001 through the Income Tax Act. The study poses two questions, the first being, whether to elect the actual value of an asset at 1 October 2001 for base cost purposes, or to accept the 'default' time apportionment method? The second question posed raises the subject of whether an asset owner should delay doing a valuation exercise on the assets they presently own or proceed with a valuation exercise now? A number of actual examples were obtained from accounting firms and analysed to see what values the different methods of determining the base cost gave and hence the amount of tax payable. The results clearly show that the longer the asset has been owned by the business or individual prior to the implementation date, the bigger the impact the Time Apportionment Formula has on the answer. The reason for this is the Time Apportionment Formula that states the following "the effect of the formula is to multiply the actual pre-valuation economic expense by a factor, which increases it in the ratio of the pre-valuation period to the whole period of ownership. When this amount is deducted from the actual proceeds, it gives the effect of the gain having arisen at an equal amount per annum over the whole period of ownership". The Market Value Method comes into play when the assets are less than two years old. The results obtained also answer the second part of the question posed of whether to wait or do the valuation exercise now. A quote from the tax planning journal answers the question in the best possible way 'to delay is to pay'. In some of the cases presented the difference between the two methods is substantial and the taxpayer would have had to pay the amount given by the Time Apportionment Formula due to the fact that the Market Value Method has a time restriction placed on it. The Act is quite explicit in the use of the Market Value Method and it's cut off date. The conclusion drawn from the study indicates that it is in the best interest of businesses and individuals to do a valuation exercise on all capital assets owned without delay. These valuation exercises will then help those businesses and individuals determine which base cost calculation method will be in their best interest.