Tax and SARS knowledge base
Can irrecoverable VAT on a capital asset form part of CGT base cost?
Can VAT that was not allowed as input tax be included in a capital asset's CGT base cost?
Last reviewed:
Direct answer
SARS lists value-added tax not allowed as an input deduction under section 23C among incidental costs that may be included in CGT base cost. The business must first establish whether input tax was actually allowed, then link the irrecoverable VAT to a qualifying acquisition or disposal cost of the relevant asset.
Do not add VAT to base cost merely because the invoice displays VAT or because an input claim was not made. The VAT position and the CGT position must be supported separately.
What this means in practice
VAT and CGT records often sit with different teams. The VAT team may decide whether input tax is deductible on a purchase, while the finance or tax team later prepares the asset base-cost schedule. If those records are not reconciled, a company can either omit qualifying irrecoverable VAT or wrongly add recoverable input tax to the capital-gains calculation.
SARS says base cost includes qualifying costs actually incurred in acquiring, enhancing or disposing of an asset that are not allowable as a deduction from income. Its base-cost page expressly includes VAT not allowed as an input deduction under section 23C. This supports a careful two-stage review: first establish the VAT treatment, then determine whether it relates to a qualifying base-cost item.
For a composite acquisition, SARS says the purchase price must be apportioned to assets broadly by reference to their market values, and the taxpayer bears the onus of justifying the allocation. This can matter where one invoice covers several capital assets, exempt or taxable activities, or an asset plus inventory.
Step-by-step
- Identify the asset and transaction.
Record the asset-register reference, supplier, invoice, date, contract, purpose and legal owner. Preserve the original tax invoice and the acquisition or disposal agreement. If a transaction contains more than one asset, record a supportable allocation.
- Determine the VAT treatment first.
Review the VAT return workpapers, input-tax ledger and relevant tax invoice. Establish whether input tax was allowed, partly allowed, denied or not claimable under the applicable rules. Do not convert a missed or disputed VAT claim into a CGT base-cost entry without checking the facts.
- Link the VAT to a qualifying base-cost cost.
The VAT should relate to a cost of acquiring, enhancing or disposing of the asset, subject to the base-cost conditions. Keep a clear link from the invoice to the underlying asset and to the base-cost schedule.
- Prevent double counting.
Recoverable input VAT should not be added to the asset's CGT base cost. Also check that the underlying expense has not been deducted from income. Use a reconciliation that shows gross invoice amount, VAT treatment and net amount included in the CGT schedule.
- Document partial or mixed treatment.
Where an asset is used for mixed taxable and exempt activities, or an invoice covers multiple assets, preserve the allocation methodology and supporting data. A single percentage without explanation may be difficult to support later.
- Recheck when the asset is disposed of.
Before calculating the capital gain, reconcile every base-cost item to original documents and prior VAT workpapers. Flag adjustments, changes in use, credit notes and later corrections for review. The disposal file should explain why the VAT component included was irrecoverable and qualifying.
Documents and records to keep
Keep tax invoices, contracts, VAT return and input-tax workpapers, asset-register entries, payment proof, allocation calculations, credit notes and the CGT base-cost schedule. Retain a short explanation of the VAT decision with the asset record, especially where the treatment is partial or unusual.
Important limits and exceptions
This guide does not decide whether the business was entitled to input tax or whether a particular VAT amount is irrecoverable. It also does not calculate the capital gain, deal with VAT adjustments or resolve mixed-use treatment. Those questions can be material and fact-dependent.
Do not treat a rejected return, an omitted input claim, accounting software setting or supplier wording as conclusive evidence that VAT was not allowed as input tax. Do not add recoverable VAT to base cost.
When to get tailored advice
Get VAT and tax advice where the asset is used for both taxable and exempt activities, was acquired as part of a business, has changed use, was bought from a connected person, or has a material VAT or CGT impact. Advice is also prudent before a property or business sale.
TaxProof can help reconcile the VAT and asset records and prepare a document pack. We cannot decide input-tax entitlement or confirm a CGT base-cost outcome without the full transaction facts.