A Comparative Analysis of the Treatment of Inflation in South African Capital Gains Tax and the Accrual Systems

Abstract

Inflation is often defined as a continuous and considerable rise in prices in general. Recently it has become a focal point due to globally elevated levels of inflation. Considering its treatment in the South African legal system, this article unpacks the contrary approaches of the Matrimonial Property Act 88 of 1984 (MPA) and the Income Tax Act 58 of 1962 (ITA) regarding inflation. These two Acts are considered as they provide different approaches to inflation, therefore different outcomes. While the MPA makes provision for inflation in determining the growth of each of the estates of spouses married out of community with the accrual system, the ITA does not recognise inflation insofar as it relates to capital gains tax. Comparing the approaches of the MPA and the ITA reveals disparities in the law and justifies the investigation conducted in this article. Accordingly, this article compares the effect of inflation and capital gains tax and why inflation is not considered when determining the base cost of an asset for capital gains tax purposes. To explain the inconsistency between the MPA and the ITA, this article firstly unpacks the characteristics of the South African matrimonial property regime insofar as it relates to inflation. Thereafter, the article characterises the South African application of the capital gains tax and articulates the shortcomings of existing capital gains tax provisions and the resulting challenges in the application of both Acts. In comparing the ways in which the MPA and the ITA deal with inflation, a clear distinction becomes evident. This article finds that, while the initial inclusion rate for capital gains tax inflation is largely accommodated, subsequent increases in the inclusion rate have erased this provision. Given these findings, this article suggests that the current South African capital gains tax regime's inclusion rate be further investigated to determine whether a wider set of exclusions could be developed to better accommodate inflation.