Want To Know More About Capital Gains Tax? | Legal Articles

 

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Want To Know More About Capital Gains Tax?

When you sell an asset, you may have to pay capital gains tax (CGT), unless there is an exclusion clause that you can apply. CGT came into effect in South Africa on 1 October 2001. 

Assets disposed of after this date attract CGT, even if the asset was bought before that date. 

You don’t need to register separately for CGT - the capital gain or loss is included in your annual income tax return. 

How Is the Base Cost Determined?

Since the capital gains tax took effect only on 1st October 2001 (effective date), it will be unfair for the taxpayer if they are taxed on the increase in value from purchase date until 1 October 2001. It is excluded from the gain for CGT purposes and the value is determined on the effective date to use as the base cost.

For assets purchased after 1 October 2001, the rules are simple: The basic cost is the amount you purchased the asset for. 

Additional costs incurred can also be added to base costs, including improvements costs, costs relating to acquisition or disposal of assets such as real estate brokerage, legal, accounting, surveyor costs and transfer costs. Running costs such as repair, maintenance, interest, insurance, etc. can not be added to basic cost.

For assets that were bought before 1 October 2001, the market value needs to be determined on this date. Say a house was purchased in 1995 for R100,000 and the value on 1 October was R200,000, the base cost will be R200,000. The same additional expenses described above can be added to the base cost. 

There are various methods that can be used to determine the effective date value. If some of the information is missing, not all methods are available, but if multiple methods are executable, the accountant will then select the most useful method.

At What Rate Is CGT Calculated?

If the property is owned by an individual or a special trust, 33.3% of the capital gain made on disposal of the property must be included in their taxable income for the year of assessment in which the property is sold. The present maximum marginal rate of income tax for individuals is 41% and therefore individuals will pay a maximum of 13.65% of the capital gain. 

Likewise, if a property is owned by a company, a close corporation or an ordinary trust, 66.6% of the capital gain must be included in their taxable income. The income tax rate for a company or close corporation is 28% and these entities will therefore pay 18.65% of the the capital gain in CGT, while trusts, whose income tax rate is 41%, will pay 27.31% of the capital gain. 

If capital loss occurs at the time of disposal of real estate, it will be offset with the capital gains for that year and if there is no capital gain, there is a possibility that it will be carried over to the subsequent evaluation period.

For individuals in the 2015/2016 financial years, the first R30,000 of their capital gain or loss in any year of assessment will be exempt and thus disregarded. This figure increases to R300,000 in the year in which an individual dies. 

What About Non-Residents? Are They Liable To Pay CGT?

Yes. Non-residents are liable for the payment of CGT on the disposal of any immovable property owned by them in South Africa, or on the disposal of an interest of at least 20% in the share capital of a company where 80% or more of the net asset value of the company is attributable to immovable property. 

S35(A) Of The Income Tax Act.

In order to facilitate collection of CGT from non-residents, our Income Tax Act requires a buyer, who is purchasing property from a non-resident, to withhold a certain percentage of the purchase price and to pay this percentage to SARS on the date of registration of transfer. 

It is important to note that the legislation places an obligation on the estate agent and/or conveyancer to disclose payment responsibility to the buyer. 

In practice, conveyancers will obtain a mandate from a buyer in order to make the payment to SARS on the buyer’s behalf.  

What CGT must be paid?
  • If the sales price exceeds R2 million, 5% must be withheld if the seller is a natural person and a non-resident;
  • 7.5% if the seller is no-resident company or close corporation;
  • 10% if the seller is a non-resident trust. 

If the amount withheld exceeds the non-resident’s CGT liability, the balance will be returned to the non-resident by SARS. Non-resident sellers can apply to SARS for a CGT directive, prior to the registration of the transfer, in which case payment of the amount shown on the directive is made to SARS, and not the percentages shown above. 

How Is Profit Calculated?

Capital income is calculated by deducting the base cost from the revenue associated with the disposal of the asset. Disposal includes a sale, donation, exchange, vesting of the property in a beneficiary of a trust or emigration.

The following may be included in the base cost:

  1. The cost of acquiring the property, including the purchase price, transfer costs, transfer duty, VAT and professional fees such as attorneys and surveyors. 
  2. Cost of improvement, remodeling, renovation etc. Provided, however, that only in cases where cost and payment can be proved by the presentation of invoices/receipts.
  3. Disposal costs of real estate, including agency commissions, advertising costs, valuation fees (including assessing property for CGT purposes) and professional fees. Costs for repairs, maintenance, insurance and rates and taxes are not deductible.

It is therefore essential to maintain an accurate record of the above costs. If such records are not retained, deductions from proceeds won’t be allowed when determining capital gains. 

All records must be kept for a period of 4 years from the date of submission of the income tax return for the year in which the capital gain or loss is reflected. 

If no return is lodged, the records must be kept for five years from the date of disposal of the property. If an objection or an appeal against a CGT assessment is lodged, the records must be kept until the assessment is finalized.

How Is Profit Calculated If The Property Was Acquired Prior To 1 October 2001?

If the property was acquired before 1 October 2001, the following methods of valuing the property at the date may be used:

  1. A fair market value of the property as at 1 October 2001, i.e. The price obtainable on a sale between a willing buyer and a willing seller at arm’s length in an open market. Evaluation must have been carried out within 3 years from the effective date (i.e. before 30 September 2004), but the property must have been valued according to its condition and in terms of the prevailing economic and market conditions as at 1 October 2001. If no valuation was obtained before 30 September 2004, this method may not be used;
  2. The time-apportionment base cost, i.e. the percentage of the total gain that was made after 1 October 2001;
  3. Where no fair market valuation was submitted and no accurate records maintained, the value as at 1 October 2001 will be deemed to be 20% of the proceeds on disposal.

Is CGT Applicable If The Property Is Being Sold As A Primary Residence?

Yes. However, there is a primary residence exemption which applies only in cases where the primary residence is registered in the name of an individual or in the name of a special trust. 

In such a case, upon disposal of a primary residence (on the part of the land not exceeding 2 hectares), any capital gain or loss up to R2 million can be excluded. 

This will not apply to properties registered in the name of a company, close corporation or trust. A person who does not ordinarily reside in South Africa cannot have a primary residence in South Africa and this exemption can therefore not apply in the event of a non-resident disposing of his/her property. 

When the residence is used partially for residential and partially for business purposes, an apportionment must be done. Likewise, where the residence is occupied for a certain period in apportionment will be required.

However, where the residence was not inhabited because it was being offered for sale, in process of erection or renovation or had accidentally been rendered uninhabitable, the exemption will apply for a period not exceeding 2 years.

If the owner is employed or trading more than 250km from his or her residence and rent it to a tenant for a period not exceeding 5 years, the exemption will apply if the owner lived in the premises for a continuous period of at least one year prior to and subsequent to the letting period and does not treat any other residence as his or her primary residence during that period.

When more than one person holds an interest in a primary residence (eg. spouses married to each other out of community of property), the exclusion will be in proportion to the interests held by each party in the residence.
 

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