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 qualify for an income tax deduction as capital expenditure, but including boats, caravans, cars, etc.
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 five hundred thousand Rand 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 five hundred thousand 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 resident.
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
- Cost of improvement or enhancement
- Costs of ownership of assets used exclusively for business purposes, listed shares and unit trust scheme
Valuations
The extended period in which to obtain valuations for the purposes of capital gains tax finally expired on the 30th of September 2004. As a result anybody who is the owner of property which was acquired after the 1st of October 2001 will no longer be entitled to use the valuation method for capital gains tax if the property had not been valued prior to 30th September 2004. A person (natural or otherwise) who was in fact the owner of immovable property as at the 1st of October 2001 and who obtained a valuation of such property prior to the 30th of September 2004 may still use the valuation method for capital gains tax purposes. However such party must submit the valuation for the property in the tax return for the year in which the property was sold. Failure to do so could result in the Receiver of Revenue not being prepared to accept the valuation method.
A person who purchased immovable property after the 1st of October 2001 may use the referred to as the normal method referred to in 1 below for the purposes of calculating capital gains tax. A person who purchased the property prior to the 1st of October 2001 and obtained a valid valuation before the 30th of September 2004 may use any one of the four methods referred to below. A person who purchased a property before the 1st of October 2001 but did not obtain a valid valuation before the 30th of September 2004 can use either method 1, 2, or 3 below.
A For properties acquired at any time (i.e. before or after the 1st of October 2001):
1. The normal method:
The capital gains tax is calculated on the difference between the price for which the property is eventually sold and the purchase price which was initially paid for the property. In addition transfer costs, estate agent's commission (on the sale of the property) and the documented costs of any capital improvements to the property can be deducted from the capital gain. It is important to note that capital improvements refer to items which increase the value of the property and do not constitute maintenance of the property. This would include things such as adding an extra bedroom to the house or installing a swimming pool. It would not include costs of repainting the property, repairing the roof or any other items which are treated as expenditure for income tax purposes. Thus the interest on the bond, rate and taxes, charges for water and electricity and similar charges cannot be deducted for the purpose of calculating the capital gains profit.
B Only for properties purchases prior to the 1st of October 2001:
2. Time apportionment method:
The Capital gain is calculated as in (A) above. The net capital gain is then pro rated according to the number of years for which the property was held after the 1st of October 2001 in relation to the number of years in respect of which the property was owned prior to the 1st of October 2001 with a maximum of 20 years prior to the 1st of October 2001 being taking into account. Thus for example if the property was purchased 10 years before the 1st of October 2001 and sold 5 years after the 1st of October 2001 only one third of the resultant capital gain would be added to the tax payers tax i.e. only 5 years of the 15 years will be taken into account as the property was owned for 15 years but only 5 of these years were after the 1st of October 2001.
3. The'80/20 principal:
In terms of the same, 20% of the capital gain is effectively exempted from capital gains tax. Accordingly 20% of the proceeds is considered as the value of the property as at the 1st of October 2001 and the capital gains tax is then calculated on the remaining 80%.
C For properties purchased prior to the 1st of October 2001 and a valid valuation was obtained before the 30th of September 2004
4. The valuation method
Capital gains tax is calculated on the difference between the price for which the property is eventually sold and the valid valuation of the property as at the 1st of October 2001. In addition estate agents commission (on sales of the property) and the documented costs of any capital improvements to the property affected after the 1st of October 2001 can be deducted from the capital gain. Capital improvements prior to the 1st of October 2001 cannot be deducted as they have already been taken into account in the valuation of the property as at the 1st of October 2001.
Any tax payer who owned the immovable property before the 1st of October 2001 and sold the property subsequent to the 1st of October 2001 is entitled to elect which of the four methods referred to above such party wishes to utilize (assuming of course that such party obtained a valid valuation prior to the 30th of September 2004). If the party did not obtain such valid valuation prior to the 30th of September 2004, then the party can only use methods 1, 2 and 3 referred to above. It is advisable for a taxpayer to work out the nett effect in respect of each of the methods before electing which of the methods to utilize.
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 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).
The table below outlines effective tax rates in respect of CGT: |
