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Brief Guide to Capital Gains Tax

Brief guide to Capital Gains Tax

This brief guide is intended to outline in very broad and brief terms, the key principles that form part of Capital Gains Tax legislation in South Africa relating to immovable property.

When is Capital Gains Tax (CGT) chargeable and payable?
The occurrence that causes any CGT liability is the disposal of an asset, for instance a residential property. Unless such a disposal occurs, no gain or loss arises.

What are affected capital assets?
Affected capital assets are considered to be property of any kind, including assets that are movable or immovable, tangible or intangible, excluding trading stock and mining assets qualifying for an income tax deduction as capital expenditure.

Will the sale of my primary residence be subject to CGT?
A primary residence exclusion of a gain of up to R1 500 000.00 means that most capital gains on the sale of a home will not be subject to CGT.

What is a primary residence?
It must be a structure, including a boat, caravan or mobile home, which is used as a place of residence by a natural person. A natural person or special trust must own an interest in the residence, and the natural person with an interest in the residence, beneficiary of the special trust, or spouse of that person or beneficiary must ordinarily reside in the home and must use it mainly for domestic purposes as his or her ordinary residence.

Where the primary residence is disposed of together with the land on which it is situated (including unconsolidated adjacent land) the one million exclusion will apply to land:

  • To the extent that it does not exceed two hectares;
  • That it is used mainly for domestic and private purposes together with the residence, and is disposed of at the same time and to the same person as the residence.

Is a primary residence exclusion an unlimited exclusion?
The exclusion will not apply to any capital gain or loss in excess of one million rand. The exclusion will further only apply in respect of two hectares of property used for domestic or private purposes. The exclusion furthermore will not apply to any capital gain or loss in respect of the period on or after the valuation date when the person was not ordinarily resident in the primary residence.

Will it apply to a residence held through a company or trust?
No, the owner is not a natural person.

How are capital gains / losses determined?
A capital gain or loss is the difference between the base cost of an affected asset and the consideration realised or deemed to be realised upon the disposal or deemed disposal of that same asset.

What is base cost?
Base cost means the cost of an asset which is deducted from any proceeds upon disposal, to determine whether a capital gain or loss has been realised. Base cost includes those costs actually incurred in acquiring, enhancing or disposing of a capital asset that are now allowable as a deduction from income. The following are included in the base cost of an asset:-

  • Acquisition costs
  • Incidental costs of acquisition and disposal
  • Capital costs of maintaining title or rights to an asset
  • Costs of improvement or enhancement
  • Costs of ownership of assets used exclusively for business purposes, listed shares and units in a unit trust scheme

Is there any relief on the inclusion of a capital gain in taxable income?
The following inclusion rates are to be applied to nett capital gains:-
  • Legal persons (including companies, close corporations and trusts) - 50%
  • Natural persons (individuals and special trusts) - 25%

In other words, a company will only include fifty percent of the nett capital gain in taxable income (fifty percent is exempt from tax) and an individual will only include twenty five percent of the nett capital gain in taxable income (seventy five percent is exempt from tax).

TAX PAYER INCLUSION RATE STATUTORY TAX RATE EFFECTIVE TAX RATE
Individuals 25% 0 - 40% 0 - 10%
Companies (standard) 50% 29% 14,5%
Trusts 50% 40% 20%

We wish to point out that this is a very brief discussion regarding the effects of CGT on the property market. This should not be deemed to be an extensive and fully detailed guide, and should only be utilised as a guideline.