CAPITAL GAINS TAX

 Definition: difference between market value and

purchase price or acquired price of the capital asset.

 Whether it is capital gain or business income depends on

the intention of the tax payer

o building sold after using some period _ capital gain.

o buildings purchased and sold frequently_ business

income. (TRADING)

HOW TO FIND THE INTENTION:

o Taxpayer’s own evidence.

o Subjectivity
o Self interest
o Reconstruction

HOW TO TEST INTENTION:

o At the time of purchase: not necessary to have
intention for making profit at the time of purchase-
ex: profit out of investment – cap.
o Intention of mixed motives – dominant issue is taken
into a/c.
o Alternative intentions – use it as asset for income
generation & then sell it - becomes business income.
o Donations or inheritance – general principle is
applied. Received land and sold – capital; received

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 land & made them into plots and sold- business
income.

o No interest to resell at a profit – though no intention,

if traced an element of business, then business
income.

 COMPANIES:
Shareholders intention is not taken.
However, board of directors resolution will be taken
as intention.

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CAPITAL GAINS ARE TAXED U/S 35,

TENTH SCHEDULE & EIGTH SCHEDULE TABLE IV

GENERAL RULE: S35:

Gross income of any person shall include the income

from sale of:
 Movable or immovable property of a business.
 Shares and debentures of a company.
 Residential property.
 Assets of international financial services centre co.

Execptions:
 S.9 : property disposed in the ordinary course of business
credited in p/l a/c.
 S. 139 : ifsc in the ordinary course of business credited in
p/l a/c.
 S. 140 : specified foreign exchange gain included in ifsc p/l
a/c.

Tenth schedule: exempted from capital gains taxation:

 Movable property of a business sold when allowances
already claimed.
 Movable or immovable property sold by mining co.

 Principal private residence sold after 5 years’ use and

once in cycle on completion of 5 years period thereof.
 Shares & debentures of public co. Sold after one year of
such acquisition provided: shares & debntures actually
traded in BSE.

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  Immovable property sold by a co. Wholly owned by funds
like, APF, ASF, MOTOR VEHICLE INSURANCE
FUND provided such disposal is within 3 months of the
date of acquisition by such fund

 Any bonds, debentures issued by govt of bot, bob, a

statutory body, special purpose vehicles formed by govt of
bot for the securitization of public debt.
 Any shares of ifsc company.

APPROACH:

(a) Immovable property

(b) Movable property

(a) Immovable property:

(i) Acquired prior to 1-7-1982
(ii) Acquired on or after 1-7-1982.

(i) Acquired prior to 1-7-1982.

Apply 10% inflation adjustment for every 12
months.
Principle:
(Cost of Purchase + Additional cost if any) x
1.1 for every 12 months from the date of
acquision/addition to 30-6-1982. Known as
capital accretion factor.

(ii) After 1-7-1982.

Indexed Value:
Capital accretion factor ON 1 JULY 1982 x
National Cost of Living Index (NCOLI)

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 prevailing on the date of sale/NCOLI on the
date of purchase or acquired.

CAPITAL GAIN =
SALES PRICE – PURCHASE PRICE =
UNINDEXED GAIN
INDEXED VALUE – PURCHASE PRICE =
INDEXED GAIN.

CAPITAL GAIN = UNINDEXED GAIN -

INDEXED GAIN

EXERCISE 1:
Don purchased an immovable property on 1-7-1977 at a price
of P60 000 and sold it on 30-7-1982 for P120 000.
(a) What is taxable capital gain?
(b) If other things remain same, what is taxable gain or loss if
the property is sold at P80 000

Suggested answer:

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(a) UNINDEXED GAIN:
Property sold at P120000
Purchase price= 60000
Un indexed gain = P60000

INDEXED (INFLATION) GAIN:

Purchase price on 1-7-1977 = P60000
Inflation at 10% for 5 years= (1.1)5 =1.61
P60000 x 1.61 = 96660
Inflation gain = 36660

CAPITAL GAIN:
UNINDEXED GAIN = 60000
Less inflation gain = 36660
Capital gain = 23340

(b) Property sold at P 80000

Purchase price= 60000
Un indexed gain = P20000
Less indexed gain = 36660
Loss = (16660)
As loss is less than inflation gain, no loss can be carried
forward.

EXERCISE 2:

JOSEPH SOLD OFF HIS NON RESIDENTIAL BUILDING ON 30

JUNE 2015 FOR P1 000 000. HE PAID BROKERAGE AT 5% ON
THE SALE PRICE. THE SAME BUILDING WAS PURCHASED ON
1 JULY 2000 FOR P400 000 AND RENOVATED THE SAME
BUILDING IMMEDIATELY AT A COST OF P100 000.

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REQUIRED:

(I) CAPITAL GAIN OR LOSS.

(II) HOW DO YOU TREAT LOSS THAT AROSE DUE TO
INDEXATION

SUGGESTED ANSWER (I)

P P
UN-INDEXED GAIN =
SALES PRICE ON 30-06-2015 1 000 000
LESS ORIGINAL COST ON 1 JULY 2000 400 000
LESS REMODELLING EXPENSES ON 1 100 000 500 000
JULY 2000
LESS BROKERAGE AT 5% ON P1 000 000 50 000
ON SALE
UN-INDEXED GAIN 450 000
PURCHASE PRICE OF THE PROPERTY ON 500 000
01-07-2000 + REMODELING
COST OF PROPERTY X (NATIONAL COST OF LIVING INDEX ON THE
DATE OF SALE/NATIONAL COST OF LIVING INDEX ON THE DATE OF
PURCHASE
P500 000X (1696.8 / 568.6) 1 492 086
LESS PURCHASE PRICE 500 000
GAIN DUE TO COST OF LIVING INDEX **992 086
UN-INDEXED GAIN (REAL GAIN) 450 000
CAPITAL (LOSS) DUE TO INDEXATION (542 086)

** GAIN DUE TO COST OF LIVING INDEX CAN BE WORKED OUT

WITH A SIMPLE PRINCIPLE OF:

COST OF PROPERTY X (NATIONAL COST OF LIVING

INDEX ON THE DATE OF SALE - NATIONAL COST OF
LIVING INDEX ON THE DATE OF PURCHASE AND
DIVIDED BY NCOLI ON THE DATE OF PURCHASE.

P500,000X (1696.8- 568.6)/ 568.6

P500,000 X 1.984
=992086**

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(II) LOSS AROSE BY SALE OF ONE CAPITAL ASSET (EXAMPLE
OF A BUILDING SOLD CANNOT BE SET OFF WITH ANOTHER
BUILDING) DUE TO INDEXATION CANNOT BE SET OFF WITH
OTHER CAPITAL GAINS OF ANOTHER ASSET AND SUCH LOSS
WRITTEN OFF DURING THE CURRENT TAX YEAR.

IF THE AGREEGATE AMOUNT OF LOSSES INCURRED IN ANY

TAX YEAR EXCEEDS THE AGGREGATE AMOUNT OF GAINS IN
THAT YEAR, SUCH EXCESS LOSS SHALL BE DEDUCTED FROM
THE EXCESS OF AGGREGATE GAINS OVER AGGREGATE
LOSSES, IF ANY, ACCURING IN THE NEXT SUCCEEDING TAX
YEAR.

Exercise 3

HH (Pty) Ltd is a construction company and it recorded a loss of

P1.5m in the year 2016 from its normal operations.It had capital
losses of P5.5m brought from the 2015 tax year.

The company disposed of shares in XX(Pty) Ltd a local company

for P6M and incurred legal fess, tax advise costs as well as
advertsisng costs of P8000, P7000 and P2000 on disposal. The
company had purchased the shares for P1M and paid P6000 as
secretarial fees on acquisition.

The company also sold an office for P10m in December 2015,

incurring P10000 in tax fees and P20 000 in legal fees at the time
of disposal. The builsing had cost P3M in May 2015. The company
had extended the building in October 2015 at cost of P1M.

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Management decided not to replace the office and immediately
leased a office for use. The cost of living indices for May 2015,
October 2015 and December 2015 were 1641,1656.8,1657.7
respectively.

The company also sold shares it held for 2 years in Sefalana

Holdings Ltd a BSE listed entity for P5M in December 2015.The
shares had cost P1M in November 2013. Determine the tax
payable.

Solution 2

Description Amount

Shares In XX (Pty) Ltd 6,000,00

Selling Price

Less Deductions
Original purchase price (1,000,000)
Secretarial Cost (6,000)

Selling Costs
Legal fees (8,000)
Tax Advice (7,000)
Advertsting (2,000)

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Total Deductions (1,023,000)
Potential Capital Gains 4,977,000
25% Allowance (1,244,250)
Capital Gains 3,732,750

Sefalana Holdings Shares

Income form the sale of Sefalana Shares is exempt.

Exempt as the company( Sefalana) is listed in BSE and the shares
were held for more than one year for that reason they should also
be exempt. (Tenth Schedule 1(d))

Office

Description Amount
Selling Price (dec 2015) 10,000,000

Cost (May 2015) 3,000,000

Indexation of Cost(1,657.7- 30,530 3,030,530
1656.8/1656.8 x 3M)

Extension(Oct 2015) 1,000,000

Indexation (1657.7- 543 1,000,543
1656.8/1656.8x1,000,000)
Disposal Costs 30,000
4,061073
5,938 927

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Un indexed Gain SP+ = 10 000 000
CT(3+1) (4 000 000)
Disposal (30,000)
5,970,0000

Indexed Index Value (Cost today)

3m(3,030,530+1,000,543+30000)=4 061 073

Costs( Before today) (4 000 000)

61 073

Disposal Gain = 5 970 000-61 073=

1, 073

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EXERCISE 4:
Joseph purchased a building on 1 July1979 for P40000. At the
time of purchase, he engaged an Attorney for looking into the
legal formalities of the purchase and he was paid 5% of the
cost price as his legal fees. The purchase contract was finalised
by a broker who was paid 2% commission on the cost price of
the building. He further incurred an expenditure of P1200 as
registration fees of the building.

On 1st July 1982, he further incurred an expenditure of P6436

for refurbishment and renovation of the building.

He sold the building on 30 June 2000 for P400 000. He paid

sales commission of 1%, paid legal fees of P1000. It is
assumed that this building is not the principal residential
building.

Required:
Taxable income of Joseph on the property disposal for the
tax year ending 30 June 2000.

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SUGGESTED ANSWER:

P P
Purchase price of the property on 01- 40 000
07-1979
Add legal fees @5% of purchase price 2 000
Add brokerage @2% 800
Add registration fee 1200
Total cost on 1-7-79 44 000
Inflation adjustment @ 10% for every
completed 12 months until 30-06-1982
i.e 3 years, multiplying factor (1.1)3 = 1.331 58 564
= (44 000 x 1.3311)

Add additional cost on 1-7-1982 6 436

Total cost on 1-7-82 65 000
Un-indexed gain =
Sales price 400 000
Less cost on 1-7-82 65 000
Less additional costs on the day of sale:
Commission 4000
Legal fees 1000 5 000
Unindexed gain 330 000
Inflation Allowance (IA) (58564-44000) 14564
Indexation Allowance (1A) from 1-7-82
to 30-6-2000 on this property.

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 Cost of property x (National Cost of
living Index on the date of sale -
National Cost of Living Index on the
date of purchase and divided by NCOLI
on the date of purchase.
P65 000 x (552– 100.00)/100.00 **293800
Capital gain = UIG-IA = 330000- 21636
(14564+293800)

THE SAME CAN BE WORKED OUT:

P65,000X (552-100)/ 100
P65,000 X 4.52 =293 800**

EXERCISE 4
Fredrik (Pty) Ltd is a resident company in Botswana. It owns three properties located in Gaborone. The
company is badly in need of money and it wants to dispose off one of the properties in the current tax year.
The company seeks your advice as to which property is to be sold so as to minimise its tax liability on
disposal. The company expects to get gross sale proceeds on each property a sum of P300 000 on 30 June
2000 the date of disposal.

Lot A:
Purchased in July 1990 for P80000 using the sale proceeds of a land purchased in 1980 for P30000. Roll
over relief was claimed and granted.

Lot B:
Purchased in January 1982 for P100 000 using the sale proceeds of a land purchased in July 1980 for
P40000. Roll over was claimed and disallowed.

Lot C:
Building acquired on 1-7-1998 by gift. At that time, it costs P100000 to purchase a similar building.
Transfer duty paid on acquiring the gift amounted to P2000.

SUGGESTED ANSWER:
PLOT A:
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Land purchased in May 1980

P30000
For two years inflation = 30000 x 1.21
=36
300

Inf allowance 6300

Indexation allowance:
36300 x (207.2-100)/100 = 38913.60

Unindexed gain = P80 000

Less cost 30 000 = 50 000.0
Less ind all. 6 300
Less inf all. 38913.6
45213.60

Capital gain = 4786.4

Roll over in July 1990.
Ind all.
80000 x 559.5-207.2/207.2 = 136 100.38

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Unindexed gain = 300 000 – 80000 = 220
000
Less ind allowance= 136
100.38 =83899.62
Add cap gain on roll over =
4786.4
Taxable capital gain= 88686.02

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 ACC 305 CAPITAL GAINS: EXERCISES

EXERCISE 1:
Don purchased an immovable property on 1-7-1977 at a price of P60 000 and sold it on 30-7-1982 for
P120 000.
(a) What is taxable capital gain?
(b) If other things remain same, what is taxable gain or loss if the property is sold at P80 000

EXERCISE 2:

Joseph purchased a building on 1 July1979 for P40000. At the time of purchase, he engaged an
Attorney for looking into the legal formalities of the purchase and he was paid 5% of the cost price as
his legal fees. The purchase contract was finalised by a broker who was paid 2% commission on the
cost price of the building. He further incurred an expenditure of P1200 as registration fees of the
building.

On 1st July 1982, he further incurred an expenditure of P6436 for refurbishment and renovation of
the building.

He sold the building on 30 June 2000 for P400 000. He paid sales commission of 1%, paid legal fees
of P1000. It is assumed that this building is not the principal residential building.

Required:
Taxable income of Joseph on the property disposal for the tax year ending 30 June 2000.

EXERCISE 3:

Other things remaining the same from exercise 2, compute the

taxable income of Joseph on the property disposal, which was
received by him, as inheritance from his great grand father
and the market value as on 1 July 1982 was P67000.
In addition, he incurred the following expenses on 1 July 1982 Legal fees: P1564
Renovation of the building. 6436
Succession duty 2500

Question 4
Fredrik (Pty) Ltd is a resident company in Botswana. It owns three properties located in Gaborone. The
company is badly in need of money and it wants to dispose off one of the properties in the current tax year.
The company seeks your advice as to which property is to be sold so as to minimise its tax liability on
disposal. The company expects to get gross sale proceeds on each property a sum of P300 000 on 30 June
2000 the date of disposal.

Lot A:
Purchased in July 1990 for P80000 using the sale proceeds of a land purchased in 1980 for P30000. Roll
over relief was claimed and granted.

Lot B:
Purchased in January 1982 for P100 000 using the sale proceeds of a land purchased in July 1980 for
P40000. Roll over was claimed and disallowed.

Lot C:
Building acquired on 1-7-1998 by gift. At that time, it costs P100000 to purchase a similar building.
Transfer duty paid on acquiring the gift amounted to P2000.

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