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The small business CGT exclusion · Tax Break: South African tax for professionals

• 0:10
  Let's consider the following scenario.
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  You, or perhaps your client own a small business and as with
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  many of these small businesses, the time now arrives where the
• 0:19
  business will be sold. So the reasons for this may vary
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  from the business having reached the point where it has become
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  so, so big that it, it needs to be part of a larger structure to
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  continue the growth. Good types, be that an
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  opportunity to do sell arose or in many cases it it's a question
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  that there it's a matter that the owner of the operator is
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  just no longer interested in conducting this business.
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  So when the sale of the business is on the cards, capital gains
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  tax would come into play. Now the capital gains tax rules
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  in the 8th schedule to the Income Tax Act provide for an
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  exclusion. And the question is when will
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  this exclusion, when would the owner of the small business
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  qualify for this exclusion? Thank you for listening to
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  episode 69 of Tax Break, your podcast OHH tax, South African
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  tax professionals and practitioners.
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  Now the question about small, those small business exclusion,
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  it's not something that's new. There's be no, there hasn't
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  really been changes to it. But over the last few months
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  I've had one or two emails from listeners asking whether I
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  would, I could do an episode about it.
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  So here we are. This is now the episode about
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  small, but the small business exemption or exclusion to be
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  more, more technically correct. Now, before we start talking
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  about small businesses, I want to ask you that if you like
• 1:50
  listening to the podcast, whether you would consider
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  writing it on your podcast platform where you normally
• 1:55
  listen to these podcasts. So as I understand it, if the if
• 1:59
  the podcast is being rated, it helps the the algorithm to to
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  suggest it more listeners and that would help me in then grow
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  the lesson advice. On that same note, if you can
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  think of anyone else who also works in South African tax who
• 2:16
  may also be interested in listening to the podcast, I
• 2:18
  would very much appreciate it if you can share the link to the
• 2:22
  podcast with that other person. I want to also remind you that
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  my e-mail address is in the notes to the episode.
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  So if there's any correspondence like this idea, if you've got
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  more ideas, suggestions for future episodes, any questions,
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  or of course, if you need tax advice, you are more than
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  welcome to send me an e-mail. Right?
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  So let's get back to the small business exclusion from capital
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  gains tax. One or two sort of technical
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  points that are that at the core of this exemption or exclusion,
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  we find it in paragraph 57 of the 8 schedule to the Income Tax
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  Act. And the exclusion is really an
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  exclusion of up to 1.8 million Rand for the disposal of small
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  businesses in certain circumstances.
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  So you've got a whole list of requirements that you need to
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  meet before you would qualify for the exclusion.
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  It's not just a matter of if you sell something that you think
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  could be a small business, then this apply state.
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  It's more complicated than that now with us, with all these
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  episodes, I think this is a topic we one could potentially
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  have a a bit of a lecture we're training session on South.
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  The idea of the podcast is not to do that.
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  Rather, I want to see some of the sort of common aspects of
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  questions that come up in, in my dealings with it.
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  So when I receive queries or when I'm, when I consult on
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  this, those things that that's really what I want to share with
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  you. So there's three aspects of this
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  that I want to talk about today. The first question or aspect is
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  how must the sale of the business be structured to
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  qualify for the exclusion? Now practically, in some cases
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  you may not be able to structure it in a way that qualifies at
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  all or in some other cases. So it really depends on who
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  holds the business. So there, there's a few
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  permutations here. It could be that the business is
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  held directly by the owner. So in other words, you've got an
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  individual or a natural person that owns the business.
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  So it's really a sole, sole prop.
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  It could be that the business sits in a company or A/C and the
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  chase of that company or CC could be held by the shareholder
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  and natural person more herself. And in some cases you might you,
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  you might find that the sheets of the business, of the company
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  that holds the business are actually owned by trust or there
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  are also instances we've got trading trusts where the
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  business is being conducted in a trust.
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  So let's stand, let's let's look at what the requirements of the
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  law are and how that, how this this, this ownership structure
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  then affects whether you qualify or not, right?
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  So what does the law say when, what type of transactions with
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  qualified? The first one is where a natural
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  person disposes of active business assets of a small
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  business. So that's really aimed at the
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  sole prop scenario where the person, the natural person owns
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  the asset and disposes of it. The second one is where the
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  natural person holds an interest in an asset in the active, in an
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  active asset of a small business via partnership and then
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  disposes of that interest by withdrawing from the
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  partnership. And the third scenario is where
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  the natural person holds a direct interest in the shares of
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  a company. Do they extend that those that
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  the value that those shapes relate to the active business
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  assets of and of a small business.
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  So in other words, the natural person holds the shares of a
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  company that holds the small business or that owns the small
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  business. When we talk about this direct
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  interest, these two additional important points that we need to
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  consider. The first one is that the
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  natural person must dispose of the entire interest in the in
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  the in the company. So in other words, that person's
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  entire shareholding in the company and the shareholding in
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  the company must be at least 10%.
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  So there is a threshold say that you you must at least have 10%
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  before you you would qualify for this.
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  So it's really the sole prop the partnership and selling of
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  shares, though those are the three scenarios that the the law
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  gate is for. However, it's not just any sale
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  of acids by sold by a sole prop via Bild via partnership or or
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  through a company. You also these the the the
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  circumstances around that sale and and the business must also
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  comply with the following requirements to qualify.
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  So if you fall into one of these three categories, you must also
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  meet the following to to qualify.
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  The first one is that the person must have held that small
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  business or interest in the small business for at least five
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  years before their disposal. Secondly, the natural person
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  must have been substantially involved in the operations of
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  that small business. And thirdly, the reason for the
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  sale must be that the person has reached the age, the age of 55.
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  So that's really sort of in, in, in the law.
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  Often a proxy for it's the, the, the reason is retirement or it
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  must be due to ill health, other infirmity, superannuation or
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  death. So it's all sort of such
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  situations where a person would naturally be disposing of a
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  business because of the fact that that person cannot really
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  or would no longer be interested in conducting it due to age or
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  wealth or death. Then of course, right.
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  So let's perhaps circle back to the question about how the cell
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  might be structured and also look at a few scenarios which
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  would clearly not qualify for the exclusion.
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  The first one would be if that interest in the small business
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  is out indirectly or via a trust.
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  So the law is quite clear, it must be a direct interest.
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  Or if the trust owns the shares of a company and the natural
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  person is a beneficiary of the trust, that wouldn't qualify.
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  So as soon as the trust becomes involved, there is a good chance
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  that you that you no longer looking at the sale that
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  qualifies for the exclusion. The second, the one that I've
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  that I've seen a few suggestions and that the question often
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  comes up is in, in a lot of instances where the company
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  holds the business, you would find that the purchaser would
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  much rather prefer to buy the business out of the company than
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  to buy the shares of the company from the seller.
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  The reason for that is of course that if you buy the shares of
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  the company, you buy everything that goes with it, including the
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  history, petition, potential claims and and obligations that
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  might be that that that company might have.
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  So it's a much cleaner transaction to just buy their
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  assets and the liabilities associated with that business
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  out of the company. So if the company sells the
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  small business receives the cash and distributes the cash as a
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  dividend to the shareholder, that doesn't qualify for the
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  exclusion, right. So those are just a few things
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  to consider from the perspective of of how to structure the
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  transaction. The second aspect that there is
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  often some debate about is what they win exactly is something of
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  small business. Now what the law tells us in in
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  the definition of a small business, the market value of
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  the assets must be less than 10 million Rand that then you look
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  looking at the small business. Okay, So what is when, what are
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  the common misconceptions or questions that come up around
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  this? We are not looking at the
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  carrying amount of the book values of the assets.
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  It's the market values of the assets.
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  So it might be that you've got assets that actually appreciate
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  in value, large property perhaps.
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  For example, you could have a scenario where the market value
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  is actually more than the book value.
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  So you're not looking at the book value, you're looking at
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  the market value. It the second point is it's not
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  the net asset value, the market value of the net assets, it's
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  the market value of the assets. So you don't you, you can't have
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  a scenario where you've got assets, you deduct the
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  liabilities to get to a net asset value and that's less than
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  10 million. The taste is you need to look at
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  the value of the assets. Then related to this, if a
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  person holds more than one interest in a in a sole prop
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  business through a partnership or through direct shareholding
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  in a in a company in these small businesses, you need to look at
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  the market value of the underlying assets of all the
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  businesses must then be below those 10 million Rand threshold.
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  So there is an aggregation requirement if you've got
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  interests in multiple small businesses.
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  And then on the Third Point relating still related to these
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  interests and multiple businesses, if if you get to the
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  point of where, where the, the, the market value of the assets
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  would still be below the 10 million Rand threshold.
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  So, and you meet all the other requirements to, to, to qualify
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  for their for the exclusion. There is an additional
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  requirement to be aware of. And that's, that's it.
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  It's not that that you only qualify for the sale of one or
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  the gain on one of these these disposals, all of them could
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  potentially qualify, but there's a time requirement in the
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  legislation. So all the qualifying disposals
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  must happen within 24 months to qualify for the 1.8 million Rand
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  exclusion, right. So what can you take home from
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  today's episode? In my mind, the Taco points
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  would be that a you have to be very careful about what and how
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  you dispose of of the business. Be you need to make very sure
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  that you are actually looking at someone with an interest in a
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  small business, including looking at their aggregation
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  rules if that person has got multiple interests in small
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  businesses. And then see, you need to also
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  take the timing of when these different interests may be
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  disposed of into account to qualify to, to see the what
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  qualifies for their exclusion. Just a reminder, as always,
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  nothing in this episode that's intended to be tax advice.
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  They're podcasters only for information purposes.
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  Until next time, goodbye.