Capital Gains Tax (CGT)

Capital gains tax (CGT) was introduced in South Africa on 1 October 2001.


Why was Capital gains tax introduced?

• CGT exist in most first world countries.
• CGT helps to widen the tax net, which should help reduce personal income tax

Who has to pay Capital gains tax?

• All South Africans
• Non South African residents who make a profit or loss, when selling fixed property located in South Africa.

Note:

In most cases it will not affect your primary residence, provided it is smaller than 2 hectares and the profit is less than R1 million. However, homeowners will be liable for CGT on second properties or holiday homes that are not occupied as a primary residence or on a portion of a primary residence that is used for business. Capital gains tax also affects all properties n the name of close corporations, trust and companies.


How is a capital gain or loss determined?

It is the difference between the base cost of the asset and the amount for which it is sold.


How will the base cost of the asset be determined?

The Income Tax Act prescribes that the base cost will be expenditure incurred to the property and any improvements that are made to it and any other costs directly brought about by the sale of the asset, for example, agent's commission. The base cost does not
include any expenditure that may be claimed as an income tax deduction or any borrowing (interest on loans) or repairs.


What is excluded from the base cost?

• The effects of inflation;
• The cost of upkeep of the asset (maintenance and repairs and insurance premiums); and
• Devaluation, for example, the wear and tear on a motor vehicle.

For what period does Capital gains tax apply?

Capital gains tax only applies to gains from 1 October 2001, in cases where assets were owned before that date and parted with after that date. The Income Tax Act specifies two methods to determine the value of the asset on 1 October 2001:

• You have two years from October 2001 to have your asset valued. We suggest that you contact a professional property valuer or associated valuer (see details below)
• Time apportionment - calculate the asset's value taking into account how long you have had the asset. For example, if you bought a holiday house 10 years ago for R350 000 and sold it after five years for R950 000 the house gained R600 000 in value in those 15 years. The gain attributable to the last five years is: 5/15 X R600 000
  

What percentage of Capital gains tax is payable?

For legal persons, 50% of their net profit will attract CGT and for natural persons 25%. This portion of the net gain will be taxed at your marginal tax rate. As an effective tax rate this means you will pay a maximum effective rate of 10% and corporate taxpayers a maximum of 15%.

For example, for natural persons the maximum marginal tax rate is 40%. Assuming the aggregate capital gain for the year of assessment is R25 000, 25% of R25 000 is R6 250, which is taxed at 40%, therefore R2 500 is payable. The R2 500 as a percentage of the original profit made is 10%.


Are there any exemptions on Capital gains tax?

Individuals and special trusts do not have to pay Capital gains tax on the first R10 000 of capital gains per year.


How will SARS find out about profits made?

SARS's computer software, the New Income Tax System (NITS), will interface with systems in the Deeds Registry, Motor Vehicle

Registry, JSE Securities Exchange (JSE) and financial institutions.