GUIDE TO CAPITAL GAINS TAX

This guide deals with some of the basic principles of Capital Gains Tax (CGT) and in particular, to matters relating to immovable property.

South Africa introduced CGT on 01 October 2001, but internationally, such a tax is not uncommon with many of our trading partners having implemented CGT decades ago.

Before the implementation of CGT you were taxed on the income earned from owning assets, but were not generally taxed on profits arising from the disposal of those assets.  For example, you were taxed on income such as rent and interest but not on the profits from selling your shares, property or other investments, unless you acquired such assets with the intention of disposing of them in a scheme of profit-making.

CGT is somewhat of a misnomer for this tax.  It is actually normal income tax on the taxable portion of a capital gain.

Briefly, all natural persons and deceased and insolvent estates pay normal income tax on 25% of the capital gains they make on disposal of immovable property.

The maximum marginal rate of income tax for individuals is 40% and therefore the maximum CGT that an individual will pay is 10% of the capital gain.

All companies, close corporations and trusts pay income tax on 50% of the capital gains that they make on disposal of property.  Because companies and close corporations pay income tax at the rate of 28%, the effective CGT rate on capital gains is 14%, while trusts, whose rate of income tax is 40%, will effectively pay CGT at the rate of 20% on capital gains.

Any capital lost on the disposal of property can be offset against other capital gains made in the same year of assessment.  If no other capital gains have been made in a year of assessment, but only losses, the loss must be carried forward to subsequent years of assessment and can only be offset against capital gains and not against income gains.

WHAT IS MEANT BY A DISPOSAL?

A very wide meaning has been given to the concept of disposal and includes:

• The sale of property.

• The donation of an asset.

• The exchange or any other alienation or transfer of ownership of property.

• The alienation or transfer of ownership of shares in a property or any other company, close corporation or vested rights in a trust.

• The transfer of ownership in property from a deceased or insolvent estate.

WHAT ASSETS WILL BE SUBJECT TO CGT?

Property of any kind and belonging to South African residents, will be subject to CGT, subject to certain exclusions like trading stock.

WHO HAS TO PAY?

• All South African residents and entities (companies, close corporations and trusts).

• Non-residents who make a capital gain on the disposal of immovable property or the disposal of an interest of at least 20% in the share capital of a company or close corporation where 80% or more of the net asset value of the entity is attributable to immovable property.

HOW IS A CAPITAL GAIN OR LOSS DETERMINED?

It is the difference between the base cost of the immovable property and the net selling price.

WHAT IS THE BASE COST?

The base cost of a property is generally the expenditure actually incurred in acquiring the property together with expenditure directly related to the acquisition or disposal or to improve the property.  The base cost does not include amounts which have been allowed as a deduction for income tax purposes.

Some of the main costs that may form part of the base cost:

• Purchase price of property.

• Transfer duty and transfer cost.

• Cost of capital improvements to a property, for example a new swimming pool or garage.

• Agent's commission.

• VAT paid

The effect of inflation and the cost of upkeep of a property (maintenance, repair, insurance premiums) are excluded from the base cost.

It is essential to maintain accurate records of all costs.

WHAT IS THE BASE COST OF ASSETS HELD BEFORE 01/10/2001?

CGT only applies to gains from 1 October 2001 and in order to determine the value of the property at that date, you may use one of these following methods:

• 20% x (proceeds less expenditure incurred after 1/10/2001).

• Market value of the property as at 1 October 2001 (in order to use this method you had to have your property valued before 30/9/2004).

• Time  apportionment base cost method.  If you had a property for 10 years before 1/10/2001 and sold it seven years after 1/10/2001  7 out of 17 portions of the capital gain will be the base cost for CGT purposes.

WHAT PROPERTIES ARE EXCLUDED FROM CGT?

EXCLUDED

• First R1.5 million gain on Primary Residence.

INCLUDED

• Primary Residence owned by you, Company, Close Corporation, or Trust.

• Portion of Primary Residence such as cottage let to a tenant.

• Second properties.

• Shares or interest in a property owning Company, Close Corporation or Trust.

FURTHER ADVICE

The information contained in this article provides a brief summary of CGT payable on the sale of immovable property.  It is highly recommended that the Seller of any immovable property consult one of our expert property and tax attorneys prior to accepting any Offer to Purchase.  This will enable us to help you having due regard to your individual circumstances.

Should you require any further assistance, we invite you to contact any of our conveyancers, namely:

Adriaan Groenewald

adriaan@cwmalan.co.za

Lynelle Kok

lynelle@cwmalan.co.za

Eddie Albertyn

eddie@cwmalan.co.za