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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 13,3% of the capital gain.
All companies and trusts pay income tax
on 66,6% of the capital gains that they
make on disposal of property.
Because companies pay income tax at the
rate of 28%, the effective CGT rate on
capital gains is 18,6%, while trusts,
whose rate of income tax is 40%, will
effectively pay CGT at the rate of 26,6%
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 R2 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:
Eddie
Albertyn
eddie@cwmalan.co.za
Marieke Ferreira
marieke@cwmalan.co.za
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