Tax and SARS knowledge base
When can a company include improvement expenditure in CGT base cost?
When may a company include asset improvement expenditure in CGT base cost?
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Direct answer
For an asset acquired on or after 1 October 2001, SARS says base cost generally comprises costs incurred in acquiring and improving the asset. A potential improvement must be actually incurred, must not be allowable as a deduction from income and must still be reflected in the asset's state or nature at the time of disposal.
That does not mean every construction, refurbishment or equipment invoice belongs in base cost. The company must document the work, link it to the asset and distinguish an enhancement from routine maintenance or an amount that is allowable as a deduction from income.
What this means in practice
An asset-improvement schedule is an evidence record, not a list of every amount capitalised in the accounts. It should answer five questions: what was the asset, what changed, when did it change, what did it cost, and why is the item not also an income deduction?
SARS says that base cost is the amount compared with proceeds to determine a capital gain or loss. It identifies acquisition costs, specified incidental costs, title-defence costs and improvements as potential components, subject to conditions. For a company preparing for a property, equipment, business or share disposal, these records should be built while the work occurs, not recreated from memory years later.
The continuing-reflection requirement is especially important. If the work has been removed, destroyed or no longer forms part of the asset being sold, do not assume it remains in the calculation. Keep records that show the finished enhancement and its connection to the asset's nature or state at disposal.
Step-by-step
- Fix the asset identity.
Use an asset-register reference and record the legal owner, acquisition date, location, original documents and business use. If a project covers several assets, map the work and cost to each asset rather than using a broad project total.
- Define the work performed.
Preserve the original scope, drawings, specifications, approvals, work orders and completion records. Describe the pre-project and post-project condition. Avoid relying on a supplier invoice label alone.
- Separate improvements from current expenses.
SARS says repairs are normally current costs and not part of base cost. Review whether the work restored existing functionality or gave the asset a distinct enhancement. Where a project includes both, obtain a reasonable invoice split and document the allocation.
- Test for double counting.
SARS explains that base-cost items are not allowable as income deductions. Check tax returns, fixed-asset schedules, maintenance ledgers and prior working papers. Do not add a component to the CGT base-cost schedule where it is allowable as a deduction from income.
- Retain proof of payment and continuing state.
Keep invoices, proof of payment, contracts, approvals, photographs, inspection certificates and asset-register updates. At disposal, verify that the improvement is still reflected in the asset. Explain any replacement, removal or partial destruction before including an amount.
- Reconcile the disposal calculation.
Create a final schedule with each qualifying item, date, source reference and tax treatment. Reconcile it to the sale file and retain the evidence with the CGT working papers. Where a composite acquisition or disposal is involved, SARS says allocation broadly follows market values and the taxpayer bears the onus to justify the allocation.
Documents and records to keep
Keep acquisition records, the asset register, project scope, supplier contracts, invoices, payment proof, technical evidence, income-tax treatment records and disposal documents. A contemporaneous project file is often stronger than a later reconstruction based on bank statements.
Important limits and exceptions
This guide does not determine whether any particular work is an improvement, whether a deduction is otherwise available, or how an asset acquired before 1 October 2001 is treated. Mixed-use, related-party, group-reorganisation and property-development facts can change the analysis.
Do not include VAT that was recoverable as input tax, duplicate a cost, include an amount allowable as a deduction from income, or add an item merely because it increased the accounting carrying value.
When to get tailored advice
Seek advice before disposal where the asset is old, was acquired before the valuation date, was improved in stages, has mixed business and private use, or is involved in a group transaction. Advice is also useful where a project invoice is mixed or the company has previously claimed allowances.
TaxProof can help organise the evidence and create an asset-improvement register. We cannot confirm a CGT base-cost claim or determine a final gain without complete facts.