Capital gains tax paid on monies not received? What can you do?

“I have a few investment properties in my property company. One such property I purchased in 2002 for R200,000 and subsequently sold in 2013 for R3,500,000. My company paid income tax on the capital gain as though I received the full R3,500,000. However by 2016 I had only received R1,500,000 when the other party fell bankrupt, leaving me without the full purchase price. SARS refuses to pay back the amount I overpaid, and I now have a huge capital loss in the company. Is there anything I can do?”

When your property company sold the property to the potential buyer, your company became liable, in terms of the Income Tax Act to pay the income tax calculated on the gain you made by reason of the sale in accordance with the following formula:

Proceeds from the sale of capital asset (i.e. purchase price) R3 500 000 
Less: Base cost of the asset (i.e. what you paid for the asset) R200 000
Equals: Capital gains R3 300 000
Inclusion rate of capital gain which is taxable R2 640 000 
Tax payable at 28% R739 200 

The Income Tax Act further determines that income tax on capital gain is payable on the amount by which the proceeds received or accrued in respect of the sale exceed the base cost of that asset. This means that your payment of tax on the full R3,500,000 is correct, as such amount accrued to you by reason of the sale transaction. 

In a recent Supreme Court of Appeal case, it was reaffirmed that the gain does not need to be already received in order for a taxpayer to be liable for income tax on capital gain, but that an amount accruing to a taxpayer is sufficient to impose a tax liability on such person. 

The fact that you did not receive the money, and that the sale was cancelled 3 years after the year in which the tax was paid, appears to have given rise to the problem of SARS being unable to re-open the tax assessment for the 2013/2014 tax year as a result of prescription and therefore unable to re-assess the capital gain for the sale transaction and refund you the overpayment. But it is not necessarily all a loss.

Although it might not seem so, a capital loss is an asset to your company as it will allow your company to set-off future capital gains against such loss. You can realise a future capital gain in your company to the full value of your current capital loss before your company becomes liable to pay any further income tax on the capital gain. A capital loss is also capable of being carried over from one year to the next, and put you in a position to turn your current loss into a future gain.

June 9, 2017
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