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
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
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.
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
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?
Primary Residence owned by you, Company,
Close Corporation, or Trust.
Portion of Primary Residence such as
cottage let to a tenant.
Shares or interest in a property
owning Company, Close Corporation or Trust.
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
Should you require any further
assistance, we invite you to contact any of our conveyancers,