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Goodwill and capital gains tax

25 Mar 2013

Sonja FrankWhen a business is sold, goodwill qualifies as an asset for capital gains tax purposes. It is therefore important to establish the value of the proceeds of the sale and the base cost of the goodwill.

When a capital asset is disposed of, one must be mindful of the possible capital gains tax consequences in terms of the Eighth Schedule to the Income Tax Act No 52 of 1962. A capital gain, or loss, is determined as the proceeds of the sale less the base cost of the asset.

Goodwill is the amount by which the purchase price of a business exceeds the net asset value of that business. More contentious is the base cost of goodwill. Since there are no special provisions concerning goodwill, the normal rules of capital gains tax are applicable. Broadly speaking this means that all expenditure that has been incurred as expenditure directly related to the creation of the asset, will form part of the base cost of that asset.

When the asset is goodwill, the question may be asked: Which costs are directly related to the creation and instillation of goodwill?

In the Comprehensive Guide to Capital Gains Tax (Issue 4), the matter is discussed as part of the determination of the base cost of an asset by using the time-apportionment base cost formula. If the goodwill/asset was valued at 1 October 2001, that value will represent the base cost of the goodwill. In cases where the valuation was not done, the time-apportionment base cost formula will be applicable.

The guidebook points out certain difficulties of applying the time-apportionment base cost formula when dealing with the creation of goodwill. The first is described as follows:

“Much of the expenditure contributing to goodwill (for example, salaries and wages and advertising costs) will have been allowed against income and will be excluded from base cost under para 20(3)(a). Costs relating to other identifiable assets (for example, an advertising sign of a capital nature339 or the cost of a building) should be allocated to those assets, rather than to goodwill. While these other assets may contribute to the existence and value of goodwill, they are considered to be separate from goodwill which is taken as an asset in its own right.”

The second difficulty is the date of acquisition of the asset. The formula requires the date at which the goodwill started to exist or was created. Determining the exact date on which goodwill was created can be tricky, if not impossible.

It follows that in most cases where goodwill has not been acquired but has been self-generated, that goodwill will have a base cost of zero or, alternatively, the value as determined on 1 October 2001.

It should also be noted that IFRS does not allow a company to include an internally generated intangible asset (such as goodwill) on the face of the balance sheet. This does not mean that the asset has no base cost, but it gives some guidance as to the nature of the asset.


  • For more information contact Sonja Frank or Estian Haupt of Exceed Tax and Advisory Services, tel. 021 882 8140 or e-mail

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