THE INCOME TAX CONSEQUENCES OF CHANGE IN USE OF ASSETS

Taxpayers may acquire assets as either trading stock or as capital assets, and later hold those assets with a purpose different from that with which such assets were acquired. For example, a share investment initially acquired with speculative intent (i.e. as trading stock) may subsequently form part of a strategic long-term asset held by the taxpayer as a capital asset. So too may a furniture retailer for example use its trading stock to furnish its own office.

Where assets that had thus far been held as trading stock commence to be held as capital assets (and vice versa), certain tax effects are triggered on either an income tax or capital gains tax (“CGT”) account. This will depend whether an asset used to be held as trading stock or as a capital asset:[1] the tax treatment is linked to a deemed realisation of the asset.

Where an asset has previously been held as trading stock, the taxpayer will be deemed to have disposed of that trading stock (if a deduction for acquiring that item of trading stock has been previously claimed) under the below circumstances:
  • The asset in question is subsequently used for domestic or private purposes;
  • The trading stock is sold at less than market value and not in the ordinary course of the taxpayer’s trade; or
  • The trading stock is either donated or distributed as an in specie dividend.
The “recoupment” for tax purposes may also kick in even if the taxpayer continues to hold the item of trading stock, in other words if the taxpayer does not actually dispose of that asset. This will be the case when:
  • The taxpayer applies the trading stock other than in the ordinary course of trade; or
  • It is no longer held as trading stock (in other words, as a capital asset).[2]
Effectively therefore, the Income Tax Act seeks to invoke tax consequences where a tax deduction had been previously claimed for the acquisition of an item of trading stock. The deemed disposal has the effect as though that item is now disposed of as trading stock when it ceases to be so applied or sold by the taxpayer. In other words, the Income Tax Act seeks to treat the trading stock as being sold once it ceases to be held as such.

A similar regime exists for CGT purposes.[3] A capital asset is deemed to be sold for CGT purposes when the taxpayer starts to hold it as trading stock, or where a personal-use asset is no longer held as such. Similar to the trading stock regime, these instances will give rise to a deemed disposal for CGT purposes, thereby triggering a CGT cost on a change in use of the asset irrespective thereof that the former capital asset has not actually been disposed of.

References:
  • [1]Even though “trading stock” is defined in section 1 of the Income Tax Act, 58 of 1962, to a large extent the intention with which an asset was acquired will be determinative of whether the asset will form part of a taxpayer’s trading stock or be a capital asset.
  • [2] Section 22(8) of the Income Tax Act
  • [3] Paragraph 12(2) of the Eighth Schedule to the Income Tax Act
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

CMV Group of Companies

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