Can I offset my R1.5m assessed capital loss with Sars?

A Moneyweb reader asks: I have a R1.5 million assessed capital loss with Sars. What can I do to maximise the use of this tax vehicle?

PSG Wealth’s Amelia Morgenrood answers:

An assessed capital loss neither decreases a person’s taxable income nor increases your assessed loss of a revenue nature. Such an assessed capital loss is ring-fenced and can be set off only against capital gains.

Capital losses can be carried forward into the next financial year in perpetuity until it’s offset by a gain. The loss can’t be carried over every year in its entirety; it’ll be reduced by the annual exemption, currently R40 000.

Losses on an investment can be offset against a gain on the disposal of another asset. The sale of different types of assets can be played off against each other. Therefore it makes sense to sell an asset where a significant capital gain has arisen, even if you did not intend to sell it in your lifetime. Since death is a capital gains tax incident, it might make sense from this perspective to realise assets to reduce your estate tax liability.

With an asset like shares or unit trusts, it might be something to consider. If shares are held for less than three years the capital gain from a sale might attract ordinary income tax and regarded as trading profits; longer and it’ll be seen as capital gains and taxed as such.

Most JSE investors with a diversified portfolio have made tremendous gains on a share like Naspers in the past. It’s possible to now have an overweight position – always risky. The exposure can be trimmed and the capital gain set off against the assessed loss. This is an excellent opportunity to diversify a share portfolio further. If you still want exposure to Naspers, you can consider buying Tencent in an offshore share portfolio.

The same goes for holdings in companies like British American Tobacco (BAT), where many SA long-term investors have overweight positions. If you still want BAT exposure, instead buy Reinet for instance, which has substantial exposure. If you have exposure to a unit trust that’s in capital gain, consider selling units and buying a similar unit trust.

Capital gains tax is becoming an increasing problem, since our relatively high inflation rate contributes to the increased value of assets like property. Capital gains aren’t a problem if you don’t intend to sell, but if an asset is held in your name, it’ll be taxed at your death.

If you’re close to retirement and have only ‘risky’ assets like shares and property, it might be an excellent time to use the assessed loss and sell some of these assets to buy income-producing assets. The extent of implementing such a plan will depend on your asset allocation and income needs. A financial advisor can do the calculations.

Capital gains tax is becoming an increasing problem since our relatively high inflation rate contributes to the increased value of assets like property.