As the world grows ever more connected, we are seeing an increasing volume of corporate transactions taking place. These typically occur as business owners are approaching retirement and they wish to capitalise on the value of the businesses that they have built up over a period of time.
Usually, a smart way of undertaking such a transaction is for the business owner to sell their business assets at a fair value, while also remaining in the business in a management capacity for a year to three years while the new owners and management teams transition into the business.
The act of selling the business assets attracts capital gains taxes because in most instances, the selling price of the assets far exceeded what those assets originally cost, if any cost at all.
The Income Tax Act provides for certain relief measures where the assets were acquired for little or no value pre-2001.
The Income Tax Act also provides for a capped relief from certain capitals gains taxes on the sale of business assets.
Paragraph 57 of the Eight Schedule to the Income Tax Act provides for certain capital gains tax exclusions, up to R1,8 million over a person’s lifetime, for the disposal of:
(a) an active business asset of a small business owned by that natural person as a sole proprietor; or
(b) an interest in each of the active business assets of a business, which qualifies as a small business, owned by a partnership, upon that natural person’s withdrawal from that partnership to the extent of his or her interest in that partnership; or
(c) an entire direct interest in a company (which consists of at least 10 per cent of the equity of that company), to the extent that the interest relates to active business assets of the business, which qualifies as a small business, of that company,
if that person at the time of that disposal held for his or her own benefit that active business asset, interest in the partnership, or interest in the company (as the case may be) for a continuous period of at least five years prior to that disposal and was substantially involved in the operations of the business of that small business during that period, and—
(i) has attained the age of 55 years; or
(ii) the disposal is in consequence of ill-health, other infirmity, superannuation, or death.
The application of the above exclusions is complex and consultation is always recommended.
Feel free to reach out to us, the team at A4 is equipped to provide you with a tailored consultation to review your upcoming business transactions and the associated taxes thereon.
Disclaimer: Nothing in this blog post should be construed as constituting tax advice or a tax opinion. A consultation is always recommended to review the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the post, Accounting 4 does not accept any responsibility for consequences of decisions taken based on this blog post. Your tax returns remain your responsibility, and it remains your own responsibility to consult the relevant primary resources when taking a decision.