Capital Gains Tax – How it impacts an individual person
Capital gains tax (“CGT”) was introduced in South Africa in terms of the Income Tax Act 58 of 1962 (“The Act”), and became effective on 1 October 2001, which is referred to as the valuation date. CGT is applicable when an individual person disposes of an asset after the valuation date. All gains and losses – known as capital gains and losses - made on the disposal of an asset, are subject to CGT, unless there are specific provisions excluding the disposed asset.
As it already forms part of the income tax system, one does not need to register for CGT separately. As an individual person you simply need to declare your capital gains and losses in your annual tax return.
Should you not be registered for income tax purposes and your total capital gains or losses exceed the annual exclusion, (currently at R 40 000.00 for the 2017 tax year), on your total capital gain or loss, and not for each capital gain transaction, then you will only be required to register with SARS as a taxpayer for the year of assessment in which you have disposed of an asset.
Should you make a capital loss on the sale of your property then the capital loss on the property can be offset against any capital gains made in the specific year of assessment. If no capital gains are made, then the capital loss may be carried forward to the following years of assessment.
A capital gain is calculated by deducting the base cost, i.e. the cost at which the property was acquired including transfer costs, transfer duty, VAT, costs of improvements, as well as costs related to disposing of the property. As the owner of the property, it is imperative that you retain your records of the aforementioned costs for no less than four years from the date of submission of your income tax return. Failure to do so may result in you not being able to receive a deduction.
When it comes to capital gains tax, SARS allows for a primary residence exclusion which exclusion is only applicable to natural persons and special trusts. A natural person can only claim one property as a primary residence. When you dispose of a primary residence you are afforded a R 2-million exclusion. The first R 2-million of capital gain or loss (“the proceeds”) on the disposal of your primary residence must and will be disregarded by SARS in line with the primary residence exclusion. This often results in most people not being subject to CGT. SARS recognises a residence as primary when:
- It is a solid structure which is used as a place of residence by a natural person;
- The residence is owned by a natural person or a special trust;
- The owner has an interest in the residence or the spouse of the owner ordinarily resides in the residence and it is used mainly for domestic purposes;
It is important to note that when a primary residence is jointly registered in the names of parties married in community of property, the R 2-million capital gains tax exclusion would be equally divided between the two parties, in that each spouse will receive a primary residence exclusion of R 1-million. The aforementioned is conditional on the basis that both spouses reside in the residence, and also that they do not own additional separate primary residences.
Conversely, if a person is married out of community of property, depending on the accrual system, or are not married at all, the R 2-million capital gains or capital loss tax exclusion is applicable in full on the sale of that particular person’s primary residence in that specific year of your income tax assessment.
Further important exclusions on capital gains and losses on the disposal of specified assets are as follows:
- Prizes or winnings from gambling or competitions properly authorised and conducted in terms of the applicable approved laws of South Africa;
- Compensation for personal injury or illness;
- Personal use assets such as your motor vehicle, house hold appliances or other assets that are used for non-trade purposes in excess of fifty percent of the time;
- Lump sum payments from your pension, provident fund or retirement annuity;
- Investments such as a tax-fee investment specified under Section 12T of the Act;
- A donation or bequest of an asset to an approved public benefit/non-profit organisation.
Herewith is an example of a typical CGT scenario:
X is an individual who purchased a property in 2005 as his primary residence for an amount of R 1 000 000.00. Subsequently, in 2008, X installed a swimming pool for the amount of R 50 000.00 (“an improvement”). The base cost of X’s property therefore is R 1 050 000.00 i.e. the purchase price plus the improvement made. X then sold his property in 2017 for an amount of R 3 500 000.00 (“the proceeds”).
Base Cost: R 1 050 000.00
The capital gain is therefore determined as follows:
- Proceeds: R 3 500 000.00
- Less: Base cost (as determined above): - R 1 050 000.00
- Gain: R 2 450 000.00
- Less: Primary Residence Exclusion - R 2 000 000.00
- Capital Gain: R 450 000.00.
X therefore made a capital gain of R 450 000.00, less the R 40 000.00 annual exclusion. X’s taxable capital gain will be determined as 40% on the net capital gain of R 410 000.00 i.e. an R 164 000.00 will therefore be included in X’s taxable income for the specific year of assessment whereby X will be taxed at the appropriate rate according to X’s income tax bracket.
Note for reader
This article is of a general nature and is not to be utilised or quoted as legal advice. We do not accept any liability for any errors or omissions nor for possible loss or damage arising from reliance on the information contained in this article. Should you require further or more detailed information, kindly contact your legal advisor.