Some years ago I received a Mandela gold coin as a long-service award. I still keep it and during the bull run on gold it seemed like a great investment. But is it?
South Africans love to brag about the investment potential of their personal collections. These range from artworks and stamps to guns, jewellery, Krugerrands, cars, boats and more. This is further encouraged by various programmes on television and the wide variety of collectibles readily available on the internet. Then as a cherry on the top, collectors claim that all their gains are free of income tax and estate duty.
Yes, there are a lucky few who have hit the proverbial jackpot, particularly with art collections. However, in my experience, the vast majority of private collectors have lost their boots and often ended up with a family heirloom that everyone squabbles over in years to come.
Here is a little trade secret of the tax nerds. If you really want to get to the bottom of a capital gains tax (CGT) issue, download the Comprehensive Guide to Capital Gains Tax from www.sars.gov.za. Duncan McAllister of SARS has spent years honing this document to perfection, covering virtually every conceivable issue surrounding CGT. It is free, and easy for anyone to use. So when you pay a tax nerd to give you CGT answers, the solutions have often been downloaded from this document.
The Eighth Schedule to the Income Tax Act deals with CGT. Paragraph 53(2) exempts from CGT, ‘a capital gain or loss determined in respect of the disposal of a personal-use asset of a natural person or a special trust ….’
Examples of personal-use assets include artworks, jewellery, household furniture and effects, a microlight aircraft or hang-glider with a mass of 450kg or less, a boat that is 10 metres or less in length, veteran cars, private motor vehicles (including a vehicle used mainly for business purposes in respect of which a travel allowance is received), and stamp and coin collections (but excluding gold or platinum coins, the value of which is mainly derived from the metal content). In order to qualify as a personal-use asset the asset must be used ‘mainly’ for non-trade purposes. The word ‘mainly’ has been held to mean more than 50%.
The above would appear to make the tax issue as clear as mud. Not always! Further complications emerge.
- The exemption does not exclude the gains and losses of family trust arrangements. So, if the taxpayer wants to claim a CGT exemption on personal assets, then estate duty savings offered by trusts must be forfeited.
- There is no tax relief on an investment mistake. Losses from the sale of personal-use assets cannot be offset against capital gains from the disposal of other investments.
- Speculative gains from the sale of personal-use assets are assessed in terms of the general provisions of the Income Tax Act and are not covered by the CGT exemption. It sometimes becomes very complicated determining the dividing line between the tax-free activities of a private collector and the fully taxable activities of a speculator.
Compare the above to other forms of investments.
Gains from the sale of a share or unit trust portfolio are subject to CGT at a maximum rate of 13,3% for personal taxpayers. This is the principle tax exposure the investor seeks to avoid by turning to personal-use assets.
Section 9C creates the guarantee of a capital receipt if shares and unit trusts are held for an unbroken period of three years. Thus the taxpayer is perfectly at liberty to acquire shares as a speculator, dispose of loss-making shares within three years of acquisition and claim the resultant loss. Profit-making shares are then held beyond the three-year period and the capital gain is assured. This guarantee does not extend to personal-use assets acquired with speculative intention.
Taxpayers are extremely anxious regarding CGT. Yet the actual collections of CGT from individual taxpayers do not currently exceed R3 billion per annum out of total tax collections of approximately R1 trillion per annum. This indicates that the bark of CGT is far greater than its bite.
Effective 1 March 2015, a retirement fund contribution is tax-deductible up to the lesser of:
- 27,5% of taxable income, or
- R350 000 per annum.
Obviously there is no tax deduction available for the acquisition of personal assets.
Yes, the personal assets of a deceased estate are not subject to estate duty. This exemption does not extend to personal collections, unless the collection is on a long-term loan to a tax-exempt institution.
In years gone by it was amazing to watch how the personal collections of an estate devolved among the heirs without being reported to the executor and were thus excluded from the estate duty computation. Although this form of fun diminishes estate duty exposure, it often results in the break up of the collection as it is split among various beneficiaries. This often diminishes the overall value of the collection.
To date the payment of estate duty has been more or less voluntary in South Africa. The administration of deceased estates is the responsibility of the Master of the High Court as opposed to the collection of taxes that is the responsibility of SARS. Thus there has been minimal audit of estate duty computations. It cannot be anticipated that this will continue.
Recently SARS has stepped up enforcement measures on estate duty collections and executors are far more careful in placing their professional reputations on the line. Personal collections, excluding guns and cars, do not currently appear on the SARS tracking systems. But a simple examination of the insurance policy of the deceased often reveals the private collection.
Personal collections create a potential vulnerability to estate duty at 20% of market value. The cash required to pay the estate duty has to be found within the estate and this often leads to liquidity problems and a forced sale scenario. On sale, personal collections often struggle to realise the anticipated market value. The cash receipt is then reduced by selling commissions and executors’ fees. Many beneficiaries of estates are left disappointed with the end result.
Estate duty exposure created by personal collections can be reduced by either a bequest to a surviving spouse (thus delaying estate duty liability until the death of the surviving spouse) or a bequest to a tax-exempt institution.
- it is far easier to realise the market value of a listed investment. Selling commissions are minimal, executors’ fees can be contained and proceeds are received without delay. These benefits usually far exceed the maximum CGT exposure of 13,3%.
- death benefits paid by retirement funds fall outside of the deceased estate. No estate duty or executors’ fees are incurred.
But what is the true profit?
When one hears the stories of handsome profits made from personal collections, always consider the following:
- Was the profit realised in cash? Or was it just an estimate of market value?
- Is the personal collection really an investment that can be sold at will? Or are the owner and family sentimentally attached to the collection, effectively complicating the sale thereof?
- What were the holding costs of the investment? Consider insurance, security, repairs and maintenance, etcetera.
- Remember that tax considerations are of secondary importance. At maximum, the tax advantage offered by a personal collection is CGT at 13,3%.
Back to my Mandela coin …
- Over the years it has gone missing in my home on more than one occasion. Fortunately when I was attacked at home, it was hidden behind a cupboard. So I still have it.
- Recently I tried to sell the coin and contribute the proceeds to a retirement annuity, thus recovering the selling costs in the form of a tax refund. The coin exchange at the mall tells me they have plenty of stock and they are not buying. If they did buy the coin I would lose about a third of the asking price of the same coin displayed in the shop front window.
Perhaps the coin would serve a better purpose if converted into a navel stud. But nobody is interested. I don’t blame them!
Personal collections are accumulated for the enjoyment of the collector and are a different form of wealth. They have little part to play in the financial planning of most South Africans and should never exceed 10% of the investor’s total portfolio.