Capital Gains Tax
1. What is Capital Gains Tax?
How it works is that a portion of the realised capital gain is included as gross income and subject to normal tax. This rule applies to individuals, entities as well as trusts. Two of the main differences between the last mentioned categories of taxpayers pertains to the percentage of the gain which is included as gross income, and certain specific exemptions that only apply to the capital gains realised by individuals.
2. Who is liable to pay CGT?
A person who is for example not a tax resident of South Africa, will be liable for tax following the sale (at a profit) of their immovable property in South Africa.
Please take note that the rules pertaining to tax residence is vastly different to that of financial residence or that of immigration or citizenship. For details on the specific rules that apply to non-residents, read here.
3. What is a Capital Gain?
This answer almost elicits more questions than answers, such as: what is an asset, what is a disposal and what is base cost?
An “asset” is defined as property of any nature and includes moveable and immovable property, tangible and intangible assets, as well as rights or interest of whatever nature in such property.
“Disposal” is defined very widely and includes inter alia the sale, donation, expropriation, cession, transfer of ownership, forfeiture or termination of an asset. The date of disposal is also the trigger date for capital gains.
The “base cost” in simple terms is the cost of acquiring an asset, plus all costs actually incurred in improving or adding to it.
4. What percentage of the realised capital gain is included as gross income?
- 40% of the gain realised by an individual;
- 80% of the gain realised by a company or closed corporation;
- 80% of the gain realised by a trust.
Using a simple example, if you invest in shares with an initial value of R10 000, hold the shares for longer than three years, and then sell them for R15 000, you would have realised a capital gain of R5,000 being the profit made on the disposal (i.e. the proceeds less the base cost of the asset). If the taxpayer in the example is an individual, 40% of the gain will be included as gross income equating to R2,000(R5,000 x 40%). Should the taxpayer have been a company or trust, 80% would have been included, equating to R4,000 (R5,000x 80%).
The table below shows the maximum effective tax rate to be applied to the gross capital gain realised.
|Effective Rate of Capital Gains Tax|
|Rates at which tax will apply at highest marginal rate|
|1 Mar 2016 – 28 Feb 2017||1 Mar 2017 – 28 Feb 2018|
|Individual||16.40%||Gains < R1.5m = 16.4% Gains > R1.5m = 18%|
A withholding tax will be applicable when persons, trusts or entities dispose of fixed assets in SA. This withholding tax is merely a provisional payment for tax and is not a final tax. The rates of the applicable withholding taxes have been increased with effect from 1 March 2017:
|Withholding Tax: Non-Residents Sale of Immovable Property|
|1 Mar 2016 – 28 Feb 2017||1 Mar 2017 – 28 Feb 2018|
Please contact our tax specialist Johan Greyling to assist you.
5. When is CGT triggered?
6. How can utilising your E-Vault minimize your CGT liability
In assessing a taxpayer’s capital gain, SARS may at any time require documentary evidence to substantiate the expenditure incurred. Where no documentary evidence can be provided, SARS will disallow such inclusion as part of the base cost. This will of course reduce the base cost leading to a greater capital gain, and subsequently a larger tax liability.
It is therefore important to keep accurate records of expenses incurred in effecting improvements to your property, and of equal importance is storing such records safely should SARS ever require proof of the expenditure incurred.
E-Vault has a folder which has been specifically created to allow you to effortlessly upload all qualifying expenses incurred in connection with your property to your personal vault. Here your records will be safely stored until you need them, allowing you to claim all your qualifying expenses and reduce your tax liability as far as possible.
The following list will assist you in determining which expenses may be included in your base cost that should be recorded and saved to your vault:
- the cost of acquring the property, including the purchase price, transfer costs, transfer duty, VAT and professional fees (e.g. fees paid to attorneys and surveyors);
- the cost of improvements, alterations, renovations and the like but only insofar as these expenses (and your payment thereof) can be proved by presentation of invoices/receipts. (Expenditure on repairs, general maintenance, insurance and rates and taxes are not deductible.)
- the cost of disposing of the property, including agent’s commission, advertising costs, valuation costs and professional fees.
For assistance to determine which expenses are included in your assets’ base cost, contact our Tax Law Department
7. When is CGT excluded?
- The ‘primary residence’ exclusion.
(This exclusion allows a resident taxpayer who used the property as his/her primary residence to exclude the first R2,000,000.00 of gain realised)
- Certain ‘personal use’ assets.
(A ‘personal use’ asset is broadly defined to refer to assets that are used for your personal enjoyment and/or maintenance.)
However, you need to note that certain assets are specifically excluded from the definition of ‘personal use assets’ and it is advisable to consult with our Tax law Department in this regard.