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CAPITAL
GAINS TAX GUIDE
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Information
supplied by the South African Revenue Services
Compiled by Bizland
2. Why is Capital Gains Tax being introduced?
3. When does CGT come into effect?
5. What are affected capital assets?
6. What is the base cost of an affected capital asset?
7. What is the inclusion rate?
8. What assets are exempt from CGT?
9. When is Capital Gains Tax triggered?
10. How are capital gains or losses calculated?
11. What if an affected asset was acquired before the effective date?
12. What records need to be kept?
13. What is the administration procedure for CGT?
14. Useful links for Capital Gains Tax
Capital
Gains Tax is the tax that you pay on any profits you make on your assets when
you sell or dispose of your assets in any way. You will therefore not pay Capital
Gains Tax on the full amount of the sale, but only on the profits. Profits accumulated
before the date when capital gains came into effect are excluded.
2. 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.
3. 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.
4. 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).
5. 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.
6. 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:
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.
7. 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%.
8. What assets are exempt from CGT?
9. 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:
10. 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) |
* = Remember, capital gains on personal-use assets fall within the CGT regime.
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:
1.
Determine if assets are included in CGT
2.
Determine proceeds from disposal of capital assets
3.
Determine capital gain/loss for all disposals in the year
4.
If applicable, apply annual exclusion
5.
PROFIT – apply inclusion rate
6.
LOSS – carry loss forward to next year
7.
Include Gain in tax return
11. 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:
12. What records need to be kept?
If you acquire an asset on or after the effective date, the following information must be kept:
These documents could include:
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:
13. 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.
14. Useful links for Capital Gains Tax
South African Revenue Services CGT help personnel