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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 40% of the capital gains they make on
disposal of immovable property.
The maximum
marginal rate of income tax for
individuals is 45% and therefore the
maximum CGT than an individual will pay
is 18% of the capital gain.
All
companies, close corporations and trusts
pay income tax on 80% 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 22,4%, while trusts,
whose rate of income tax is 45%, will
effectively pay CGT at the rate of 36%
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.
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WHO HAS TO
PAY?
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All South
African residents and entities
(companies, close corporations
and trusts).
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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.
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HOW IS A
CAPITAL GAIN OR LOSS DETERMINED?
It is the
difference between the base cost of the
immovable property and the 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.
Agents 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 of
CGT purposes.
WHAT
PROPERTIES ARE EXCLUDED FROM CGT?
EXCLUDED
First R2 million gain on Primary
Residence.
INCLUDED
Primary Residence owned by a 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 Corporations 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.
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