Don't let the Receiver take what isn't his!

If you own intangible assets such as brands, you now have just fourteen months to have them valued for Capital Gains Tax (CGT) purposes. The valuation must reflect the asset’s condition as at October 1 2001. The idea behind this concession by South African Revenue Services (SARS) is to provide companies the opportunity to establish a base cost for their assets which will be used to calculate a capital gain should the asset be sold at some time in the future.

SARS is not too concerned how the valuation is conducted at this stage but when the time comes the commissioner could carry out an audit of the approach and assumptions made. It is vital, therefore, to have the valuation conducted by some reliable method and to keep a thorough record of the process and source data.

But what happens to companies who do not have these valuations conducted by the deadline? The Receiver has this covered and it will almost certainly not be to the benefit of the seller of the asset.

One of two methods might be used: time apportionment and a percentage of the proceeds.

The first of these takes account of the longevity of the asset. Say for instance the company bought the brand five years prior to October 1, 2001 and sells it five years after that date. The first five years belong to the seller and the second to the Receiver. In other words, after deducting the original cost, the gain will be applied to half of the purchase price only. Obviously the further away from October 2001 the sale takes place, the more the Receiver will be paid.

The second assumes that, after the costs of the sale have been deducted, the base cost will be deemed to be 20% of the sale price. Tax will be levied on the difference between the net proceeds and the deemed base value. If no October 1, 2001 valuation has been conducted and it is not possible to establish an original cost for the asset, this is the method that will be applied.

SARS did not create these two systems to be advantageous to the taxpayer. It is highly likely that proper valuations carried out during the two year window period, as at October 2001, will give the owner of the asset a value benefit over the one that might be imposed at some point in the future. But this option has a severely limited life. The 30 September 2003 deadline looms and in the stern words of the SARS writer: “failure to do so (carry out the valuation as at 1 October 2001), means that this method cannot be used.”