I recently visited the Karoo towns of Richmond and Graaff-Reinet. The former is renowned as the ‘book town’ of South Africa. It has several shops with vast collections of rare books, some worth very real money. Valuable artworks are also produced and sold in these towns and I was also fortunate to see a variety of classic vehicles.
Such items appreciate in value. When they are disposed of, the question of capital gains tax inevitably comes up. Here’s the good news. The South African Income Tax Act (paragraph 53 of the eighth schedule) provides that personal-use items, jewellery (excluding gold and silver coins), antiques, art and classic cars are exempt from capital gains tax as long as they are owned by individuals, as opposed to companies or held in a trust, and are not used for purposes of trade.
If you have a valuable spinning wheel, for example, it is exempt from capital gains tax unless it is part of an enterprise for the making of wool. There is a fine line here, as classic cars might be used for ‘business purposes’ in that the vehicle is driven by the owner in the course of their work.
My view is that simple, everyday-use cannot transform the item into one used for or in trade. It remains a personal use asset.
No limit to exemption
A lawyer’s personal roll-top desk, if not depreciated in the books of account under the general office contents, would be a personal use asset. However, if it were depreciated as a part of the office contents, then it would be used in trade.
Currently, there is no upper limit to the exemption – it applies regardless of the increase in value of the asset.The rules do hamper estate planning in some respect, as the placing of the asset in trust would take away the exemption. The bequeathing or donation of an interest or a right in the asset to safeguard it in trust is also not allowed.
However, the transfer to trust would be free of capital gains tax. A donation of this sort would attract donations tax but the rules also allow an exemption of R100 000 per person per annum, so many items could be donated to trust free of capital gains tax.
How to manage risk
Any businessperson carries risk. Thus placing an asset in trust is a good idea, as trust assets, if properly administered, are out of reach of creditors. The safety of the antique book, valuable painting, item of jewellery or classic sports car is possibly more important than the capital gains tax exemption, which could be lost at the stroke of a pen.
Another method of safeguarding assets is to donate them to responsible children or the risk-free spouse who has signed no sureties, although such a donation would be free of capital gains tax and donations tax in any event. In sum, there are many valuable items, highly collectible, that may increase in value and could be a tax-free store of wealth for their owners.