Capital Gains Tax (CGT) was introduced on 1 October 2001 and is payable on the profit a seller makes when disposing of a property whether it is owned by an individual, a trust or a company.
What is meant by Capital Gain?
A capital gain on the disposal of an asset is the amount by which the proceeds of such disposal exceed the base cost of that asset.
What is base cost?
The base cost of an asset is what was paid for it, plus the expenditure. The following can be included in calculating the base cost: The costs of acquiring the property, including the purchase price, transfer costs, transfer duty and professional fees e.g. attorney’s fees and fees paid to a surveyor and auctioneer; the cost of improvements, alterations and renovations which can be proved by invoices and/or receipts; the cost of disposing of the property, e.g. advertising costs, the cost of obtaining a valuation for capital gains purposes, and estate agents’ commission.
How was base cost of assets held calculated before 1 October 2001?
If the property was acquired before 1 October 2001 one of the following methods to value the property may be used: 20% x (proceeds less expenditure incurred on or after 1 October 2001). The market value of the asset as at 1 October 2001, which valuation must have been obtained before 30 September 2004. Time-apportionment base cost method. (Original cost (proceeds – original cost) x number of years held before 1 October 2001) divided by (the number of years held before 1 October 2001 over the number of years held after 1 October 2001).
How is Capital Gains Tax paid?
Capital Gains Tax is not a separate tax from income tax. Part of a person’s capital gain is included in his or her taxable income. It is then subject to normal tax. A portion of the total of the taxpayer’s capital gain less capital losses for the year is included in the taxpayer’s taxable income and taxed in terms of normal tax tables.
How is Capital Gain calculated?
In the case of an individual, the first R40 000 of the total capital gain will be disregarded. Then 40% of the net capital gain made on disposal of the property must be included in the taxable income for the year of assessment in which the property is sold. When the property is owned by a company, a close corporation or an ordinary trust, 80% of the capital gain must be included in their taxable income. Special Trusts are treated in the same way as individuals. It is clear that the more onerous CGT implications of property ownership in the name of a company or an ordinary trust must be carefully considered.
Primary residence and Capital Gains Tax
As from 1 March 2012 the first R2 million of any capital gain on the sale of a primary residence is exempt from CGT. This exemption only applies where the property is registered in the name of an individual or in the name of a Special Trust. The property should furthermore not exceed 2 hectares. If the property is used partially for residential and partially for business purposes, an apportionment must be done. If more than one person holds an interest in a primary residence, the exclusion will be in proportion to the interest held by each party. For example, if two individuals have an equal interest in the primary residence, each will qualify for a primary residence exclusion of R1 million. They will also be entitled to the annual exclusion, currently R40 000.
(This article is just a brief introductory outline of the subject. It is suggested that professional advice should be sought on the implications of CGT when buying and selling property.)