Capital Gains Tax - a property owner reality
Category General News
Introduction
Capital Gains Tax (CGT) was introduced in South Africa with effect from 1 October 2001 (referred to as the "valuation date") and applies to the disposal of an asset on or after that date. Disposal here includes for example sale of an asset, donation of an asset, death, cessation of residence and loss or destruction of an asset. An asset is widely defined and includes property of whatever nature and any right to, or interest in, such property.
Proceeds The amount received by or accrued to the seller on disposal of the asset constitutes the proceeds. Assets disposed of by donation, for a consideration not measurable in money, or to a connected person at a non-arm's-length price are treated as being disposed of for an amount received or accrued equal to the market value of the asset.
Base Cost Base cost is the amount against which any proceeds upon disposal are compared in order to determine whether a capital gain or loss has been realised. Base cost for assets acquired on or after 1 October 2001 would include, for example:
- the costs of acquisition or creation of the asset;
- the cost of valuing the asset for the purpose of determining a capital gain or capital loss;
- the following amounts actually incurred as expenditure directly related to the acquisition or disposal of the asset, namely - - the remuneration of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal advisor, for services rendered;
- transfer costs;
- securities transfer tax, transfer duty or similar tax or duty;
- advertising costs to find a seller or to find a buyer;
- cost of effecting an improvement to or enhancement of the value of the asset
For assets acquired before 1 October 2001, in order to exclude the portion of the gain or loss relating to the period before 1 October 2001, you need to determine a value for the asset as at that date (referred to as the "valuation date value"). Further information can be obtained in the Interpretation Notes and Guides available on the SARS Website for download.
Methods to determine the valuation date value (1 October 2001) of the asset: 20% OF PROCEEDS: 20% × (proceeds less allowable expenditure incurred on or after 1 October 2001). This method would typically be used when no records have been kept and no valuation was obtained at 1 October 2001.
VALUATION: Market value of the asset as at 1 October 2001. In order to use this method, you must have valued your asset on or before 30 September 2004. TAB: Time-apportionment base cost method. This is a method of calculating the value of the asset based on how long you have owned it before, and on or after 1 October 2001.
Holding costs generally do not form part of the base cost of an asset. Thus, expenditure on repairs, maintenance, protection, insurance, rates and taxes, or similar expenditure is specifically excluded. Borrowing costs (including bond registration and bond cancellation costs) are also generally excluded.
Primary Residence:
A home will not be a primary residence unless -
- it is owned by a natural person (not a trust, company or close corporation); and
- the owner or spouse of the owner must ordinarily reside in the home as his or her main residence and must use the home mainly for domestic purposes. The first R2million of any capital gain or loss on the sale is disregarded for CGT purposes. This exclusion means that you need to make a capital gain of more than R2 million in order to be subject to CGT.
Annual Exclusion:
For each year of assessment an annual amount (referred to as the "annual exclusion") of the sum of your capital gains and losses is excluded for CGT purposes. The annual exclusion increases in the year in which a person dies. The annual exclusion only applies to natural persons (not a trust, company or close corporation) and is currently set at R40 000.00 per annum.
Maximum Effective Rate of Tax The maximum effective rate of tax, being the actual liability incurred in the disposal of an asset, after all the allowable exemptions and deductions have been considered, are:
- Individuals - 18%
- Companies / Close Corporations - 22,4%
- Trusts (not Special Trusts) - 36%
Conclusion The explanation given in this article has been simplified. Capital Gains Tax is a very complicated tax and all property owners should consult a tax expert when attempting to calculate their true liability in disposing of an asset.
Author: Kruger Attorneys & Conveyancers INC
