Capital Gains Tax

CAPITAL GAINS TAX

1.       WHAT IS CAPITAL GAINS TAX?

·         Capital Gains Tax (“CGT”) is a tax that is levied against gains that are made on the disposal of assets provided that certain criteria are met;

·         CGT was implemented on 1 October 2001 (“the effective date”) and is regulated by the Eighth Schedule to the Income Tax Act 58 of 1962 (“the Act”);

·         In terms of S26A of the Act the taxable capital gain of a person in a year of assessment is included in his taxable income and is therefore subject to normal tax.

2.       PERSONS LIABLE FOR CGT:

·         CGT applies to individuals, trusts and companies;

·         Both South African residents and non-residents are subject to CGT.

3.  REQUIREMENTS TO BE MET TO CALCULATE CAPITAL GAINS OR CAPITAL LOSSES:

3.1 There has to be an asset

     *   Whist the definition of asset in the Eighth Schedule is wide enough to include virtually any asset, the Act does exclude capital gains and losses on the disposal of certain specified            

          assets. Some of the important exclusions include:

·         Personal – use assets, which include belongings such as a motor vehicle, a caravan, artwork, stamp collection, furniture and household appliances and other assets used mainly (more than 50%) for a non-trade purpose ;

·         Boats not exceeding 10 metres in length and aircraft having an empty mass of 450 kilograms or less which are personal – use assets;

·         Lump sum payments from pension, pension preservation, provident, provident preservation and retirement annuity funds (approved retirement funds);

·         Proceeds from an endowment policy or life insurance policy (but not if it is a second-hand policy or a foreign policy);

·         Compensation for personal injury or illness;

·         Prizes or winnings from gambling, games or competitions which are authorised by, and conducted under the laws of South Africa (eg. The National Lottery);

·         Donation or bequest of an asset to an approved public benefit organisation;

·         Disposal of an interest of at least 10% in a foreign company

·         Receipt of certain land restitution claims; and

·         A tax-free investment under S12T.

*    The Act further contains certain exclusions that are limited to a specified amount, such as:

·         The small business asset exclusion (limited to R1.8million during a person’s lifetime); and

·         The primary residence exclusion (limited to R2million per primary residence).

3.2 There has to be a disposal of the asset during the relevant year of assessment:

·         A disposal is said to arise when there is an event, act, forbearance or operation of law that results in the creation, variation, transfer or extinction of an asset and included in this definition is sale, donation, expr opriation, conversion, granting, cession, exchange or any other alienation or transfer of ownership of an asset.

·         It is important that attention is paid to the date on which the disposal occurs, as this may affect in which year of assessment the CGT will be included in the taxpayer’s taxable income.

3.3 The base cost of the asset must be determined:

     *    The base cost of assets acquired before 1 October 2001 is determined differently from those acquired on or after 1 October 2001.

                        3.3.1  Assets acquired before 1 October 2001:

     *    The base cost of assets acquired before 1 October 2001 is calculated as follows:

·         The value on 1 October 2001 (also referred to as “the valuation date value);

·         PLUS any expenditure incurred on or after 1 October 2001.

·         The base cost of assets acquired on or after 1 October 2001 is calculated as follows:

·         The actual cost of the asset;

·         PLUS expenses actually incurred that are directly related to the acquisition (eg. Transfer costs);

·         PLUS the cost of expenditure actually incurred in effecting improvements to the asset, but excluding:

a.       Costs that are deductible under other Sections of the Act in the determination of the taxable income of the owner;

b.       Mortgage bond repayments;

c.       Expenditure on repairs, maintenance, insurance payments or other similar expenditure.

    *    It is always important to remember that the taxpayer bears the onus of establishing the base cost of the asset. If the taxpayer is unable to do this, the base cost will be deemed to           

             be Rnil (or as much as can be established). It is therefore essential that the taxpayer retains all documentation that verifies expenditure incurred by him.

3.4 The proceeds on disposal of the asset must be determined (normally referred to as the selling price of the asset).

    *     Whenever there is a disposal of an asset and the base cost has been determined, the next step in calculating CGT is to establish the proceeds received or accrued on the disposal of   

               the asset.

4.  DETERMINATION OF TAXABLE CAPITAL GAIN:

      *    If a disposal or deemed disposal of an asset took place during the year of assessment, the capital gain or loss should be calculated using the following formula:

PROCEEDS        (less)        BASE COST          (equals)          CAPTAL GAIN/LOSS

5.  TAXABLE CAPITAL GAIN:

      *    If a person has a net capital gain, it must then be multiplied by the applicable inclusion rate, and the result in then included in the normal taxable income.

6.  ANNUAL EXCLUSIONS:

7.  PRIMARY RESIDENCE:

*   In the case of a natural person or Special Trust, the first R2million of the gain on the sale of a primary residence is exempt from CGT.

7.1     What constitutes a “primary residence”?

      *    A home will not be a “primary residence” unless:

a.  It is owned by a natural person; and

b.  Such owner or spouse of the owner must ordinarily reside in the home as his or her main residence and must use such home mainly for domestic purposes.

      *    It is important to note that gains will not be fully excluded in the following circumstances:

a.  If the gain on the sale of a primary residence exceeds R2million, the portion of such gain that exceeds R2million will be subject to CGT;

b.  The gain attributable to a portion of the property that exceeds 2 hectares is subject to CGT; and

c.  The primary exclusion does not apply to the portion of the gain that relates to any part of the primary residence used for the purpose of trade.

7.2 “Deemed” period of ordinary residence:

      *    A taxpayer will be treated as having been ordinarily resident for a continuous period of up to two years even if he/she was not living in their home during such two year period if  

               one of the following circumstances applies:

a.  The taxpayer’s old home was in the process of being sold whilst a new primary residence was acquired / in the process of being acquired;

b.  The taxpayer’s home was being built on land acquired for the purpose of erecting a primary residence;

c.  The primary residence has been accidently rendered uninhabitable;

d.  The taxpayer has passed away.

7.3 “Deemed” domestic usage despite letting:

·         A taxpayer will be treated as having used his/her primary residence for domestic purposes despite having let the property for rental if:

a.  Such taxpayer was absent from the residence for a period not exceeding 5 years; and

b.  The taxpayer and his/her spouse resided in the residence as a primary residence for a continuous period of at least 1 year before and after the letting period; and

c.  The taxpayer did not have another primary residence during the letting period; and

d.  The taxpayer was either:

·         Temporarily absent from South Africa during the letting period; or

·         The taxpayer was employed or carried on business more than 250km from the primary residence.

8.  DECEASED ESTATES:

      *   A person who dies is deemed to have disposed of his or her assets for an amount equal to the market value of such asset on the date of his/her death;

        *    The capital gains in the estate are then taxed to the extent that they exceed R300 000.00, subject to the proviso that any assets that are transferred to a surviving spouse are treated as having been  

               disposed of for any amount equal to the base cost of the assets;

       *     The practical effect of this proviso is that the assessment of the capital gain in such circumstances and the payment of tax on the capital gain will be deferred until the surviving spouse disposes of  

              such asset.

9.  WITHHOLDING TAX:

     *     S35A of the Act provides that a withholding tax applies to non-resident sellers of immovable property;

       *      The purchaser of any property purchased for a price in excess of R2million from a non-resident is obliged to withhold a portion of the purchase price and to pay such withheld amount to SARS;

     *     The conveyancer and the Estate Agent are obliged to inform the purchaser that the seller is a non – resident for tax purposes and can then advise on the procedure to be followed  

                in respect of paying the withholding tax to SARS;

       *      If the non-resident is registered with SARS for tax or furnishes security to SARS for the payment of the CGT, SARS can issue a directive that no amount needs to be withheld by the purchaser.

Article by David Campbell