Why is Capital Gains Tax being introduced?
The absence of Capital Gains Tax (CGT) creates many distortions in the economy, by encouraging taxpayers to convert otherwise taxable income into tax-free capital gains. SARS has noticed that clever taxpayers have made use of these conversion transactions, which has eroded the corporate and individual income tax basis, reducing the efficiency and equity of the overall tax system. CGT therefore protects the integrity of the personal and corporate income tax basis and can materially assist in improving tax morality.
When does Capital Gains Tax come into effect?
CGT came into effect on Monday 1 October 2001. Only gains made after this date will be taxed, therefore it is important to know the value of an asset on this date.
Who is liable to pay Capital Gains Tax?
Resident individuals, companies, close corporations and trusts will be subject to capital gains tax on the disposal of any local or worldwide assets.
Emigration is deemed to give rise to a disposal of assets.
For resident individuals, certain private use assets are exempt from Capital Gains Tax (e.g. motor car, clothing, etc.).
CGT also applies to non-residents in respect of local immoveable property (or interests therein) or assets of a local permanent business establishment (e.g. a branch office).
What are affected capital assets?
Affected capital assets are any kind of property, be it movable or immovable, tangible or intangible, for example land, mineral rights, office blocks, plant and machinery, motor vehicles, boats, caravans, trademarks, shares, etc. Affected capital assets exclude trading stock and mining assets that qualify for an income tax deduction as capital expenditure.
What is the base cost of an affected capital asset?
The base cost of an asset it basically what you spend on attaining the asset as well as any other expenditure directly related to this or the disposal of the asset. It also includes any costs you encounter on improving the asset, provided that you haven’t claimed these costs against your income tax and that these improvements are still there when you dispose of the asset. Base costs of an affected capital asset therefore may include:
The original cost of actually acquiring the asset Any incidental costs related to the acquisition or disposal: legal fees, stamp duty, transfer duty agent's commission, broker's fees conveyance costs, advertising costs, valuation costs Any costs incurred through maintaining title or rights to the asset, such as the legal costs incurred when disputing your right to an asset you own The cost of improving on the asset, provided that the improvements are still there on disposal VAT paid and not claimed or refunded may also form part of the base cost Note: Current costs such as interest, repairs, insurance, rates and taxes may not form part of the base cost – these costs would normally be on revenue account, rather than being capitalised.
EXAMPLE:
An individual taxpayer acquired a second townhouse shortly after the CGT effective date with the sole intention of generating a rental income. The total cost of acquisition amounted to R450,000 and a tenant took occupation of the property immediately after it had been acquired and occupied the townhouse right up until the taxpayer sold it, 4 years later.
As the garden was larger than normal and at the insistence of the tenant, who was prepared to pay a higher rental, the taxpayer put in a swimming pool and a sauna for R50,000 cash, 2 years after acquiring the townhouse.
The property, being in a sought after area, was sold for R800,000 and agent’s commission of R52,000 was paid. The original cost of R450,000 was bonded in full. During the course of ownership the taxpayer had incurred the following expenses
Interest on bond over the property - R264,822 Insurance premiums on the property - R 9,600 Rates and taxes - R 15,000 Townhouse complex levies - R 33,600 Repairs to a leak in the roof - R 1,500 Total costs incurred - R324,522
Rental income received during this time amounted to R360,000
What may be included in base cost?
Acquisition cost - R450,000 Improvement / enhancement cost - R 50,000 Agent’s commission upon sale - R 52,000 Total base cost - R552,000
What capital gain is realised upon the sale of the property?
Proceeds upon sale of property - R800,000 Less: Total base cost - R552,000 Capital gain realised - R248,000
What about the current costs incurred in maintaining the property? These costs may not form part of the base cost. As rental income amounting to R360,000 was generated during the course of ownership these current costs amounting to R324,522 would have been deducted against this income with the net profit being subjected to normal income tax.
What if the property was a holiday home at the coast and there was no rental income during the period of ownership? As no domestic or private expenses, or expenses not incurred in the production of income, are permissible as deductions against taxable income in terms of normal income tax rules, these current costs would not be deductible against revenue account. However, their identity would not change and they would not be allowed to switch over to capital account. Hence, they would not form part of base cost, even though they may not be utilised on revenue account.
What is the inclusion rate?
Individual only need to pay CGT on 25% of the net gain, while companies, close corporations and trusts need to pay on 50%.
What assets are exempt from CGT?
Your primary residence (i.e. the home that an individual/spouse or special trust owns and usually lives in) unless you make a gain or loss on it of more than R1 million All private motor vehicles used for personal use, not business purposes Personal belongings and effects, such as jewellery and collectibles, but excludes boats, caravans, aircraft, share certificates and gold or silver coins (such as Kruger Rands) Any proceeds from a life insurance or endowment policy (except for a second-hand policy) Any compensation you receive for personal injury, illness or defamation actions Prizes or winnings you receive from lotteries, betting or competitions, provided you are not a professional gambler Foreign exchange gain or loss on currency you exchange back into Rands having used it for your personal use for a trip overseas Small-business assets that you dispose of, where the proceeds will be used for your retirement, provided that you are over the age of 55 or you retire due to ill health Any institution fully exempt from normal taxation, such as government departments, local authorities and approved public benefit organisations
When is Capital Gains Tax triggered?
CGT is triggered when a disposal has taken place – i.e. when there is a change of ownership when the asset is either:
Sold Given away Scrapped Exchanged Lost Destroyed Redeemed or cancelled Back to top
How are capital gains or losses calculated?
A capital gain or loss is the difference between the base cost of an affected asset and the consideration realised upon disposal of the asset. Where the capital asset was acquired before the effective date, time-based apportionment will be applied – i.e. CGT will only be paid on gain or loss after the effective date. A taxpayer then offsets capital losses against capital gains.
Capital losses may only be deducted against capital gains and may not be offset against income from other sources. However, where the assets are depreciable assets, only capital gains fall within the CGT regime. Losses, scrapping allowances and recoupments still fall within the normal income tax regime.
A R1,000 per annum primary exclusion will apply to a net capital gain/loss in respect of all capital assets disposed of by an individual during the course of a tax year, before any inclusion rate relief is given. Thus the first R1,000 of a net gain or loss for a tax year will fall outside of the CGT regime.
Where the net capital loss exceeds R1,000, the excess may be carried forward to future years of assessment.
EXAMPLE 1
An individual taxpayer acquired shares listed on the JSE for investment purposes 6 months after the effective date of CGT for R10,000 and disposed of all those shares 2 years later for R10,500. The taxpayer was not considered to be a share dealer for tax purposes. In the same year, 6 months before the shares were sold, the taxpayer disposed of a speedboat for R10,000. This asset had been acquired 8 years before the effective date for R20,000. No other capital gains or losses arose during the course of this tax year.
Are the assets on revenue account? No, the taxpayer did not trade in shares or speedboats, therefore these transactions fall within the CGT regime rather than the normal income tax regime.
Did a CGT event occur? Yes, both capital assets were disposed of, ownership changed.
Does a specific exemption or rollover (deferral) relief apply? No, neither asset disposed of is specifically exempted, nor is rollover relief applicable.
Do capital gains or losses arise? Shares – a capital gain arises (not a personal-use asset) Speedboat – a capital loss arises (a personal-use asset)
Were any of the assets acquired before the effective date? Yes, the speedboat was acquired 8 years before the effective date, therefore, time-based apportionment is to be applied (see next point below) in respect of this asset and a capital loss of R2,000 is determined.
R20,000 – R10,000 = R10,000 x 2/(8+2) = R2,000
As this capital loss relates to a personal-use asset, it is excluded from the CGT regime.
What is the chargeable or net position for the year?
Capital gain = R 500 (R10,500 – R10,000) Capital loss = R Nil (As calculated above, but excluded – personal-use) Net gain = R 500 (R500 – R0)
Does the R1,000 per annum primary exclusion apply? Yes, as the taxpayer is a natural person, it does apply. As the net capital gain is less than R1,000 it now falls outside of the CGT regime.
EXAMPLE 2
Same as for example 1, except the shares were disposed of for R7,000 and the boat was disposed of for R22,000. The first three questions asked in example 3 should also be asked in this example before continuing.
Do capital gains or losses arise? Shares – a capital loss arises (not a personal-use asset) Speedboat – a capital gain arises (a personal use asset)
Were any of the assets acquired before the effective date? Yes, the speedboat was acquired 8 years before the effective date, therefore, time-based apportionment is to be applied in respect of this asset and a capital gain of R400 is determined.
R22,000 – R20,000 = R2,000 x 2/(8+2) = R400
What is the chargeable or net position for the year?
Capital loss = R3,000 (R10,000 – R7,000) Capital gain = R 400* (As calculated above) Net loss = R2,600 (R3,000 – R400)
Does the R1,000 per annum primary exclusion apply? Yes, as the taxpayer is a natural person, it does apply. The net capital loss is reduced by R1,000, and now amounts to R1,600, which falls within the CGT regime.
What happens to this capital loss? As this net capital loss falls within the CGT regime it may be carried forward to subsequent tax years.
Therefore to calculate CGT:
What if an affected asset was acquired before the effective date?
If you acquired an asset before the effective date but disposed of it after the effective date, the asset will be subject to CGT, based on the gain or loss it accrued after that date. For example, if you purchased a second property 10 years prior to the effective date for R250 000, and sold it 5 years after the effective date for R850 000, you would have made a profit of R600 000, but you will only pay CGT on gain acquired after the effective date:
R600 000 x 5 years = R3 million BUT this R3 m was actually gained over a 15 year period, therefore R3 m / 15 years = R200 000 – the portion of the capital gain which can be attributable to the period after the effective date As an individual you would also be allowed the primary exclusion of R1000, therefore you would only be subject to R199 000 x 25% = R49, 750 CGT Back to top
What records need to be kept?
If you acquire an asset on or after the effective date, the following information must be kept:
Date of acquisition Details of any amounts forming part of base cost on disposal Date of disposal Details of any consideration received in exchange for the asset These documents could include:
Copies of contracts of purchase and sale Market valuations Invoices, receipts or bank stamped cheques for services rendered Advice notices relating to amounts paid by you to entities in which you have an interest Note: You must keep records relating to your ownership and all costs of such assets for 4 years from the date SARS acknowledges receipt of your income tax return reflecting the disposal. If, however, you are not required to submit a return and an asset was disposed of for more than R10 000, you should keep the records for 5 years after date of disposal.
If you have failed to keep records, there are a number of ways of acquiring them:
Your lawyer or estate agent will have kept copies of most of the records you need and will provide you with these If you have made improvements to immovable property, ask your builder for an invoice copy If you have bought shares in a listed company, your stockbroker will be able to provide you with the information you need
What is the administration procedure for CGT?
CGT forms part of normal income tax and as such, chargeable net capital gains or losses are to be included in the normal income tax return and subjected to rates applicable to taxpayers. Where the taxpayer is a SITE only taxpayer, an abridged return will be available for completion and subsequent submission.
As noted previously, capital gains and losses are to be excluded from the computation of provisional tax, based on the irregular nature of such items. The general provisions of the Income Tax Act covering such aspects as returns, assessments, objections and appeals and payment and recovery of tax also apply to the CGT regime.
Useful links for Capital Gains Tax
South African Revenue Services CGT help personnel
SARS CGT Return Form – CGT1
SARS CGT Valuation Form
SARS CGT FAQ