Capital Gains Tax (CGT) is only applied to profit one makes on a property when it is disposed of and not to the entire value of the property.
What percentage of the capital gain must be included in taxable income for the year the property is sold in?
For properties owned by an individual or special trust – 25% of the capital gain must be included in the taxable income for the year of assessment in which the property is disposed of. The present maximum marginal rate of income tax for individuals is 40% which means individuals will pay a maximum of 10% of the capital gain.
For properties owned by a company, a close corporation or an ordinary trust … 50% of the capital gain must be included in their taxable income. The income tax rate for a company or close corporation is 30% and these entities will therefore pay 15% of the capital gain in CGT, while Trusts, whose income tax rate is 40%, will pay 20% of the capital gain.
What happens if a capital loss is made on the disposal of the property?
The loss may be set off against any capital gains made in that year of assessment. However, if no capital gains were made, the loss may be carried forward to subsequent years of assessment.
For individuals, the first R10,000 of the capital gain or loss in any year of assessment will be disregarded. This figure increases to R50,000 in the year in which the individual dies.
Are non-residents liable for the payment of CGT?
Yes, non-residents are liable for the payment of CGT on the disposal of any immovable property owned by them in South Africa or on the disposal of an interest of at least 20% in the share capital of a company where 80% or more of the net asset value of the company is attributable to immovable property.
How is a capital gain calculated?
A capital gain is calculated by deducting the base cost of the property from the proceeds on the disposal of the property.
Disposal includes a sale, donation, exchange, vesting of the property in a beneficiary of a trust or emigration.
The following may be included in base cost:
- The costs of acquiring the property, including the purchase price, transfer costs, transfer duty, VAT and professional fees (eg. attorneys and surveyors)
- The costs of improvements, alterations, renovation, etc
- The costs of disposing of the property, including agent’s commission, advertising costs, valuation costs (including valuing the property for CGT purposes) and professional fees
Expenditure on repairs, maintenance, insurance and rates and taxes are not included in base costs.
It has become essential to maintain accurate records of the above costs. If records are not kept, no deduction will be allowed from the proceeds to determine the capital gain. Therefore it is essential to search for and compile records relating to the costs and dates of acquisition of the property and subsequent costs relating thereto. Records must be kept for a period of 4 years from the date of submission of the income tax return for the year in which the capital gain or loss is reflected.
Does the ‘primary residence exclusion’ apply in all cases?
No. The primary residence exclusion will apply only to natural persons and special trusts. Upon disposal of a primary residence (on land not exceeding 2 hectares) only capital gains or losses up to R1m can be excluded. It will not apply to properties registered in companies, close corporations or Trusts.