(a) the nature of the right; (b) the importance of the purpose of the limitation; (c) the nature and extent of the limitation; (d) the relation between the limitation and its purpose; and (e) less restrictive means to achieve the purpose.’ A capital gain or loss, as contemplated in the Eighth Schedule to the Income Tax Act, 58 of 1962, as amended, (‘the Act’) may arise where there is a disposal of an asset during a year of assessment, having regard to any proceeds received or accrued and to the base cost of the asset disposed of.
If one accepts that section 25 of the Constitution supra confers on South African citizens a right to no expropriation of property – not limited to land, as set out in section 25(4)(b) – without compensation, does such right constitute an ‘asset’ for capital gains tax (‘CGT’) purposes?
The definition of ‘asset’ in paragraph 1 of the Eighth Schedule includes:
‘(a) property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any currency, but including any coin made mainly from gold or platinum; and (b) a right or interest of whatever nature to or in such property.’ It would seem from the above that the right to no expropriation of property without compensation, embodied in section 25 of the Constitution, does constitute ‘a right or interest of whatever nature to or in such property’.
If the Constitution were amended to abolish the right to no expropriation of property without compensation, would this give rise to the ‘disposal’ of such ‘right or interest of whatever nature to or in such property’?
Paragraph 11 of the Eighth Schedule provides inter alia that:
‘a disposal is any event, act, forbearance, or operation of law which results in the creation, variation, transfer or extinction of an asset’. If the right to no expropriation of property without compensation were to be abolished by an amendment to the Constitution, it seems that this would be an extinction of an asset, by operation of law, the asset in question being the right to no expropriation without compensation of any property.
And it stands to reason that this would occur without compensation of any kind, ie South Africans will not be compensated for the fact that their right to no expropriation of property without compensation has been ‘disposed of ’.
It would seem, then, that what will arise from the constitutional amendment contemplated above would be a capital loss, which is described in paragraph 4 of the Eighth Schedule as follows:
‘A person’s capital loss for a year of assessment in respect of the disposal of an asset … during that year … is equal to the amount by which the base cost of that asset exceeds the proceeds received or accrued in respect of that disposal’. Given that there would be no proceeds, it seems that each and every person who loses the right to no expropriation without compensation by virtue of an amendment to the Constitution would suffer a ‘capital loss’ equal to the amount of the base cost of the right so lost (there being no proceeds).
In many cases the base cost of a pre-valuation date asset can be determined with reference to the market value of the asset on the valuation date, 1 October 2001, in terms of paragraph 26(2) read with paragraph 29 of the Eighth Schedule.
As always in tax matters, the fact that it may be difficult to value an asset does not mean that such asset cannot be valued.
We suggest that an acceptable valuation would be the value of the property or properties in question together with the right to no expropriation thereof without compensation less the value of the property or properties in question without the right to no expropriation thereof without compensation.
This – it seems to us – would be the taxpayer’s capital loss should certain politicians make good on their undertaking to amend the Constitution to abolish – and thereby bring about the disposal of – the existing right – an asset – to no expropriation without compensation.
JULY 2018 122