Capital Gains Tax

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1. What is a capital gain?

It is the profit you make when you sell something that you own. A capital loss is when you sell something for less than it cost you.

2. What is Capital Gains Tax (CGT)?

Income tax is a tax on income earned. CGT forms part of the income tax system and is a tax on the profits you make from selling something that you own [that is not otherwise taxed].

3. Do I have to register for CGT?

Not if you are registered as an income taxpayer. CGT only comes into effect when you dispose of an asset — when you sell something you own. This is called a CGT event. The profit then forms part of your taxable income. It must be included in your income tax return for the year of assessment in which you sold the asset.

4. But what if I am not registered for income tax purposes?

·                     If you are a SITE taxpayer, for example, and you have a CGT event, and the proceeds are above a certain amount, you will have to register.

·                     If you have any doubts in this regard, contact your local Receiver of Revenue's office.

5. When does CGT become effective?

1 October 2001

6. What assets are excluded for CGT purposes?

Certain assets are excluded from CGT — you will not have to pay tax on the profit you make from selling them. These are some of the important exclusions:

·         A primary residence (R1 million of gain or loss) (see Section 7).

·         Most personal belongings such as motor vehicles, furniture, collectables, etc., but not gold and platinum coins — these are taxable.

·         Proceeds from an endowment policy or life insurance policy (but not a second-hand policy).

·         Compensation for personal injury or illness.

·         Prizes / winnings from a South African competition, e. g. the National Lottery.

7. What is meant by a primary residence?

There are two basic requirements for a home to be considered a primary residence:

·         It must be owned by an individual (not a trust or company/ close corporation).

·         The owner, or the spouse of the owner, must ordinarily live in the home, and must use the home as an ordinary private residence. If a part of the home is used for business purposes, that part does not form part of a primary residence (see Section 8) and it must be included for CGT purposes.

8. When is a primary residence subject to CGT?

·         If the capital gain or loss on the sale of the home is more than R1 million, the portion over R1 million is subject to CGT.

·         When the property is larger than 2 hectares, the area over 2 hectares is subject to CGT.

·         When part of the property is used for business purposes, that part of the property is subject to CGT.

9. What happens if I do not ordinarily live in my home, because I moved before selling it?

You will be treated as if you were ordinarily resident, for a continuous period of up to 2 years, if you were not ordinarily resident during that period for any of these reasons:

·                     Your old home was being sold while you were finding and buying a new one.

·                     Your home was being built in order to be used as your primary residence:

·                     The home has been accidentally rendered uninhabitable.

10. Basic framework for calculating CGT

Work out how much you made from selling assets.

Take off the amount from selling assets that are excluded (assets not subject to CGT).

Work out the capital gain or loss for everything you sold in the year.

Take off the annual exclusion if applicable (see Section 11).

Profit                                                   Loss

Apply the inclusion rate         Carry forward the loss to next (see Section 12). year's CGT calculation

GAIN TO BE INCLUDED IN TAX CALCULATION

11. What is the amount of the annual exclusion?

The annual exclusion is the amount of capital gains that can be taken off your total capital gain in one year before it is taxed. The annual amount for one person for one year of assessment is R 10 000. If a person dies during a year of assessment, that person's annual exclusion is R 50 000. This applies to both gains and losses (see the example in Section 17).

12. What is the inclusion rate?

For individuals, only 25% of the net gain is included when calculating the tax payable. For companies, close corporations and trusts, 50% of the net gain is included when calculating the tax payable.

13. What are the inclusion rates, statutory rates and effective rates?

14. How are capital gains or losses calculated?

A person's capital gain is the amount by which the selling price exceeds the base cost  of the asset (see Section 15). A capital loss is the amount by which the base cost of the asset exceeds the selling price.

  Loss                                      Gain

Selling price                 R10 000       Selling price   R20 000
Base cost                     R20 000       Base cost       R10 000
Capital loss                (R10 000)       Capital gain   R10 000

15. What is the base cost?

The base cost of an asset is what you paid for it plus whatever else you spent that was directly related to buying it and selling it, and to improving it. The base cost does not include any amount otherwise allowed as a deduction for income tax purposes.

Some of the main costs that may form part of the base cost of an asset are:

·         The price you originally paid to buy it.

·         Transfer costs, stamp duty, VAT paid and not claimed or refunded on the asset.

·         Advertising costs to find a buyer or seller.

·         Cost of improvements to the asset.

·         The cost of having the asset valued in order to determine a capital gain or loss.

·         Costs directly related to buying, making or selling the asset, e. g. fees paid to a surveyor, broker, agent, consultant, etc. for services rendered.

·         Cost of establishing, maintaining or defending a legal title or right in the asset.

·         Cost of moving the asset from one place to another.

·         Cost of installing the asset, including the cost of foundations and supporting structures.

16. How do I work out the base cost of an asset that I owned before 1 October 2001?

You do not have to pay the full CGT amount when you sell an asset that you owned before 1 October 2001. To work out how much of the gain or loss you can take off for the period before 1 October 2001, use any one of these methods:

a) 20% of the proceeds when it is sold can be deemed to be the base cost.

b) The market value of the asset on 1 October 2001, which is called the valuation date, is the base cost. The valuation must be done before 30 September 2003.

c) The time apportionment method; the calculation must be done as follows

Note: Where there is a loss, the formula will reduce the original cost by the portion of the loss relating to the period before the valuation date.

Where no records have been kept, methods a or b must be used.

17. A basic example

Set out below is a basic example of how CGT works in the case of an individual, showing the annual exclusion, carry-over of losses, and the inclusion rate:

Year 2:

Loss on sale of land                                      (30 000)
Gain on sale of shares                                  10 000
Sum of gains and losses                              (20 000)
Annual exclusion                                           10 000
 -Aggregate capital loss                               (10 000)
Assessed capital loss from year 1              (  5 000)
 -Assessed capital loss carried to year 3  (15 000)

Year 3:

Gain on sale of share                                   100 000
Less: annual exclusion                                 (10 000) -
Aggregate capital gain                                   90 000
Assessed capital loss from year 2              (15 000) (see above)
Net capital gain                                               75 000
Apply inclusion rate of 25%                           18 750

The amount of R18 750 must be included in the taxable income for year 3.

The printed version of this guide was sponsored by the United Kingdom's DFID
DFID: Department for International Development British Development Co-operation

Further information

For further information about CGT, please contact your local Receiver of Revenue / Taxpayer Service Centre or phone our office.

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