Some facts on CGT:
Capital gains tax (CGT) is not a separate tax but forms part of income tax. A capital gain arises when you dispose of an asset on or after 1 October 2001 for proceeds that exceed its base cost at that time.
A South African resident, as defined in the Income Tax Act, 1962, is liable for CGT on assets located both in and outside of South Africa.
CGT applies to individuals, trusts and companies.
A person who buys South African immovable property or an interest in such property from a non-resident for a consideration that exceeds R2 million must withhold tax from the purchase price and pay it to SARS.
What steps must I take?
Simply declare your capital gains and losses in your return of income covering the relevant year of assessment. Keep the records necessary to determine a capital gain or loss in a safe place as many years may elapse between the time you acquire an asset and dispose of it.
How is capital gains tax calculated when applied to the disposal of a capital asset such as property?
A ‘disposal’ might be the ‘actual physical disposal’ of the capital asset by sale or it could be the ‘deemed disposal’ of an asset. An example of a deemed disposal would be death of the owner.
What’s important is that a capital gain or capital loss must be determined for each asset that you dispose of during any one tax year. Total capital gains are then offset against total capital losses resulting in a net gain or net loss.
Important capital gains tax changes as from 2012:
The inclusion rate for individuals is 33, 33%. The maximum effective rate is 13, 33% for the top tax bracket
The inclusion rate for companies is 66, 67%, making their net effective rate 18, 67%.
The bad news for trusts is that the inclusion rate is also 66, 67%. The net effective rate applicable to trusts is a whopping 26, 67%.
The annual capital gain/loss exclusion is R30, 000 for individuals and special trusts.
The exclusion on death for individuals is R300, 000.
The primary residence exclusion is R2 million + base costs.
The capital gain = selling price - the base cost.
Where the Base cost includes original cost + transfer duty + transfer fees + bond registration fees + improvements + selling cost
And selling cost includes estate agent’s commission + bond cancellation fee + certificates of compliance (for example electrical, beetle, plumbing, gas and electrical fence compliance certificates), etc.
Improvement cost includes all additions over the years such as alterations, improvements, alarm system, new plants, paving, etc.
In addition, should you decide to put your property on the market and aim for a higher selling price by doing repairs and painting before selling, SARS allow for these costs to be deducted as improvements.
It is important that each homeowner keeps a file with proper records of the initial purchase costs as well as all further capital improvements and relevant expenditures
Example 1: Selling property bought after 1 November 2001
Say Person A has an annual taxable income of R680, 000 and more and is at the maximum tax rate of 40%.
He bought his primary residence in 2002 for R2 million after 2001 when CGT was implemented, and has registered his property in his personal name. He sells the property 12 years later for R5.5 million.
Therefore R5.5 million – R2 million primary residence exclusion = R1.5 million capital gain and a further base cost of R500 000 (agents fees, improvements etc) is subtracted = R1 million capital gain. This amount will be added to his annual tax return and the effective CGT rate will be 13.3% of the R1 million or R133, 000.
Example 2: Selling property that was bought before 1 November 2001
Person B sold his property that he bought in 1991 (10 years before Capital gains tax started in South Africa on 1 October 2001) for R300, 000. He sold the property on 1 November 2013 (12 years after 2001) for R3 million.
CGT is therefore calculated at R3 million – R300, 000 = R2, 700, 000 (X) capital gain and a taxable capital gain of (X) x 12/(10 + 12) years, therefore R1, 472, 727.
Example 3; Selling property that was partially occupied and partially let during ownership
If a person sells his property after 10 years, that was occupied as a primary residence for 7 years and he rented another property in a different town for 3 years due to work circumstances, then SARS will still give him the R2 million primary residence exclusion after the 10 year period.
However, if we use the same example and he bought another property after 7 years which is close to the first property, he will be able to claim only 70% of his primary residence exemption when selling the first property 10 years later.
Example 4: Selling property that is not deemed a primary residence
If a person buys a property for R10 million that is not occupied as a primary residence and then later sells it for R11 million. Then the CGT will be calculated on the capital gain of R1 million.
Exclusion of R30, 000 applies, therefore R970, 000.
An inclusion rate of 33, 33% of the R970, 000 balance is taxable, therefore R323,333.
It is imperative that you do your capital gains tax calculations carefully and arrive at the proper base costs and deductions when selling your property.
For CGT or personal tax information contact our local tax consultant:
Fanus Jonck. Tel: 021 914 7454. Email: firstname.lastname@example.org