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CAPITAL GAINS TAX
General
Since the announcement of the imminent introduction of Capital Gains Tax, which was scheduled for October 1 2001, there has been much consternation and uncertainty surrounding the topic, particularly with regard to its potential impact on the property market.
In its simplest form, a capital gain arises when an asset is sold for an amount in excess of its original purchase price, however only the increase in value after 1 October 2001 will be subject to tax. The profit, or the difference, is the capital gain. The government has proposed that individuals be granted an annual exclusion on the first R10 000 of the gain (or loss), and then pay tax on a quarter (25 percent) of the remaining gain, according to the individual's tax rate. The new law brings the South African tax system into line with those of many other countries such as Australia, USA, Canada, Britain and Botswana.
1. Are only SA residents' properties subject to CGT in SA?
No, non-residents' immovable properties in the Republic of South Africa are taxable. This also includes non-residents' indirect interests in property, for example, through a company.
2. Are only my SA properties subject to CGT?
CGT applies to a South African resident's worldwide assets.
3. What is included in immovable property?
Immovable property includes vacant land, improved land, sectional title units, shareblock shares, time-share interests and usufructuary rights.
4. When is CGT triggered?
CGT is triggered once an asset is disposed of or a deemed disposal takes place.
5. How does one dispose of a property?
A property is "disposed of" when ownership is changed or there is a variation or transfer. A change of ownership takes place, for example, when a property is sold, exchanged, donated, expropriated, destroyed or by the vesting of an interest in a trust.
6. What is a deemed disposal of property?
A "deemed disposal" takes place when there is no change in ownership of the asset but the circumstances of the owner change:
o The day that a person ceases to be a SA resident;
o The day that an asset becomes trading stock of that person;
such disposals will be treated as having being disposed of for their market value on the day before they became non-residents or the day before the asset changes its status.
7. How is a capital gain or loss determined?
Simplistically, the capital gain or loss is the proceeds from the disposal of that asset minus the base cost.
8. How is the base cost calculated?
The base cost is the expenditure actually incurred in acquiring the asset and any expenditure directly related to the acquisition or disposal of the asset, plus expenditure incurred in effecting improvements to the asset. The base cost of assets held at the introduction of CGT is determined by using one of three options:
o Market value of the asset on the valuation date;
o 20% of the proceeds of disposal of the asset; only if no records exist.
o The time-apportionment base cost of the asset.
9. Which costs can be included in 'expenditure directly related to the acquisition or disposal of the asset'?
Incidental costs such as: legal fees, transfer duty, conveyancing costs, stamp duty, agent's commission, valuation costs and advertising costs can be included. Vat paid and not reclaimed can also be included.
10. Can interest and insurance premiums form part of the base cost?
Current recurring costs cannot form part of the base cost, only costs incidental to acquiring and disposing of the property (see Q9) can be included.
11. Can repairs and maintenance and rates and taxes form part of the base cost?
These costs cannot form part of the base cost, as they are specifically excluded.
12. What happens if my property was acquired before 1 October 2001?
Properties acquired before the inception date and disposed of after that date are subject to CGT on a time-based apportionment or on a basis of valuation. Any capital increase in value arising prior to the inception date is not subject to CGT.
13. How long do I have to get my property valued?
You have 2 years from 1 October 2001 to have the property valued. In the event that such value exceeds R10 million then this information must be forwarded to SARS within said time period.
14. How will the time-based apportionment be applied?
Time-based apportionment effectively excludes changes in value prior to 1 October 2001. When the property is sold after 1 October 2001 and the capital proceeds exceed the base cost, a taxable capital gain exists but only that part attributable to the period after 1 October 2001 is taken into account.
15. How will the time-based apportionment be applied?
a) I purchased a holiday home 10 years before the inception date for R300 000.
b) On purchasing I paid R15 000 in transfer costs & legal fees
c) I sell this property 5 years after the inception date for R750 000.
Method
Cost = R315 000
Proceeds = R750 000
Gain = R435 000 (750 000 - 315 000 = 435 000)
Pre-inception date gain = 435 000 x 10/15 = R290 000
Time apportionment base cost = cost + pre-inception gain
= 315 000 + 290 000
= R605 000
Capital gain = proceeds - time apportionment base cost
= 750 000 - 605 000
= R145 000
NOTE:
The time apportionment base cost calculation is complicated when any improvements are effected prior to inception date. In this situation, each improvement is treated as a separate asset and separate time apportionment base cost calculation must be done for each asset. However, post inception date improvements are added to the time apportionment base cost prior to calculation of the capital gain or loss.
16. How does the time-based apportionment calculation work with pre-CGT implementation date improvements?
In year 1 the asset was purchased for R4000 000, in year 4 and year 7 improvements of R1000 000 and R3000 000 are effected respectively. In year 10 CGT was introduced. In year 12 the asset was sold for R12000 000.
17. What is the annual exclusion?
A R10 000 per annum exclusion applies to a net capital gain or loss. This exclusion applies to only natural persons and special trusts during a single tax year.
18. How is the annual exclusion applied to a natural person's annual tax assessment?
Once a capital gain on property has been calculated, it is added to all other capital gains or losses of that particular tax year, this amount is then reduced by the annual exclusion of R10 000, giving an aggregate capital gain or aggregate capital loss. If one has an aggregate capital gain for the current year, one can set off prior years' assessed capital loss and the result is a net capital gain. A portion of the net capital gain (see question 20) is then included with ordinary taxable income on the assessment for the year. If one has an aggregate capital loss for the current year this amount is added to the prior years assessed capital loss to give a new assessed capital loss, which can be set off against future aggregate capital gains.
19. What is the "taxable capital gain"?
In the case of natural persons a taxable capital gain is 25% of the net capital gain. In the case of companies, close corporations or trusts the taxable capital gain is 50% of the net capital gain.
20. How much CGT does a natural person pay on a taxable capital gain?
A natural person includes the taxable capital gain in his/her taxable income. The amount is then taxed according the to the income tax tables. Currently the maximum tax rate on the tables is 42%. This means that a person at this level effectively pays 10,5% tax on the net capital gain (i.e. 42% of 25% = 10,5%)
21. How much CGT is payable by a company or close corporation?
Companies and close corporations must include 50% of the net capital gain in their taxable income for the particular year's assessment. The income tax rate for companies is currently 30%. The effective CGT rate is therefore 15% (i.e. 50% of 30% = 15%).
22. How much CGT is payable by a trust?
Trusts must include 50% of the net capital gain in their taxable income for the particular year's assessment. The income tax rate for trusts is currently between 32% and 42%. Therefore the effective CGT rate is between 16% and 21%. Special trusts that have been established for the benefit of the incapacitated must include 25% of the net capital gain in their taxable income for the particular year's assessment. The income tax rate for trusts is currently between 32% and 42%. Therefore the effective CGT rate is between 8% and 10,5%.
23. What is the 'primary residence exclusion'?
A natural person that sells his/her primary residence disregards so much of the capital gain or loss that does not exceed R1 million. (Provided that there is no apportionment for business use or unoccupied periods.)
24. When does a property qualify as a 'primary residence'?
A primary residence is one in which a natural person holds an interest; and that person (or a beneficiary of that trust or a spouse of that person or beneficiary of that trust) personally resides in as his/her main residence.
25. I live in a caravan. Would this be construed as a 'primary residence'?
A residence means a structure, including a boat, caravan or mobile home, which is used as a place of residence by a natural person.
26. May I have more than one 'primary residence'?
Only one residence may be a primary residence of a person if he has an interest in more than one property at a given time.
27. Will my 'primary residence' still be exempt from CGT if it exceeds 2 hectares in size?
The primary residence exclusion only applies in respect of a primary residence (with land) limited to 2 hectares. If the primary residence exceeds 2 hectares, any gains on the excess will be subject to CGT.
28. Can I transfer my primary residence from my company/close corporation to myself, to advantage of the 'primary residence exclusion'?
In the event that one's primary residence is owned by a company or close corporation, a CGT and transfer duty free period of one year will be allowed. This exemption from Transfer Duty only applies when the acquirer is a natural person who, together with his spouse held all of the share capital or members' interest from 1 October 2001 until transfer. During this time property ownership can be transferred to the individual at market value so that the primary residence exclusion can be utilised, the individual will lose the advantage of selling the shares in the CO/CC and realising a higher purchase price as a result of the purchaser not having to pay transfer duty.
29. Can I transfer my property from my trust to myself as a natural person so that the primary residence exclusion can be utilised?
The same concession as mentioned above applies (Q28) in respect of transfer from a trust to a natural person. Except the natural person in question must have been the settlor of the trust and have disposed of the residence to the trust.
30. Does a property developer pay CGT?
A property developer buys and sells property regularly as part of his/her business, the profit on these transactions is not capital, but revenue in nature and will be subject to income tax not capital gains tax.
31. If I bring about improvements to my property after having the valuation done, how will I be compensated when I sell?
Improvements brought about after the valuation date will be added to the base cost when calculating the capital gain.
32. Do I need to be able to "prove" what the base costs are?
All components of base cost must be evidenced by means of invoices or other records.
33. What will happen if I have not kept these records?
Where the taxpayer does not give proof of the base costs to SARS:
o And if the property was acquired before the inception date and the taxpayer has not bothered to have the asset valued, 20% of the price on disposal (selling price), will be deemed to be the base cost.
o And if the property was acquired on or after 1 October 2001, the base cost will be deemed to be nil.
34. What happens if I sell my primary residence when I retire and subsequently move to my second home…which then becomes my primary residence?
a) I sell my primary residence on retirement three years after CGT implementation date.
b) I move to my second home on retirement. I have owned my second home for 15 years; 5 years before inception date and 10 years after inception date (the property was valued at inception date)
c) My second home becomes my primary residence.
d) I sell my second home for R1,950 000 after living there permanently for 7 years.
Summary of events:
Year 1 - purchase second home
Year 5 - implementation of CGT
Year 8 - sale of first home/ move into second home
Year 15 - sale of second home
To calculate the net capital gain on the sale of the second home:
Proceeds on the sale of second home = R1 950 000
Valuation on date of inception of CGT = R500 000
Cost of adding a room after date of valuation = R 60 000
Cost of valuation = R 3 000
Estate agent's commission = R 47 000
Base cost = R610 000
Capital gain (proceeds - base cost) = R1 340 000
Primary residence exclusion on the 7 years (out of a total of 10 years)
that the second home has been utilised as the primary residence: 7/10 years × R1000 000 = R700 000
Taxable Capital Gain (R1 340 000 - 700 000) = R640 000
Note: The primary residence exclusion is apportioned for partial use as a primary residence for the period after implementation of CGT only.
35. Who must do the valuation?
SARS has indicated that valuations may be done by the taxpayer, or by any person having expertise in a specific field. It should, however, be noted that the onus remains with the taxpayer who would be responsible for and be able to justify the valuation so determined.
36. When must valuations be submitted?
SARS has indicated that valuations of intangibles, (greater than 1 million), and high value assets, (greater than 10 million), must be submitted to SARS together with the taxpayer's annual return immediately within the expiry of the two-year period.
37. What happens at death?
At the date of death assets are deemed to have been disposed of by the deceased at market value. Although CGT and estate duty are in no way conceptually linked, SARS has indicated that there will be reduction in the estate duty rate to 20% as a result of the introduction of CGT. In addition, CGT payable will be allowed as a deduction in determining the dutiable value of the estate. (I.e. in the estate duty calculation)
38. If I am buying a property (to be used as a primary residence) should I put it in a cc or should I put it in my own name?
Properties in CC's have generally been able to command higher selling prices because no transfer duty is payable on the sale of the CC. Transfer duty is payable by a CC at a flat rate of 10% on the value of the property, when it is first acquired. In the hands of an individual, the transfer duty is on a sliding scale - 1% on the first R70 000, 5% on the next R180 000 and 8% on any value thereafter. On a property value of R1 million, the transfer duty payable by the CC would be R100 000. The same property acquired by an individual would attract transfer duties of R69 700. If the property is used as a primary residence and sold to buyers looking for a primary residence then both the buyer and seller will lose out on the CGT primary residence exclusion of up to R105 000 (being 1 million x effective rate of 10,5%). It is advisable to evaluate each case on its own merits to determine which is most tax efficient.
39. If I own our town home and my spouse owns our holiday home, are these both primary residences?
In the case of the holiday home you have to ask whether it is factually where your spouse usually lives - not whether, of her own homes, this is where she lives most often. If you have a town home that you live in during the week and your wife lives permanently in her holiday home, then you may well qualify to have two primary residences between you.
Please note: In the preparation of this document, every effort has been made to offer the most current, correct and clearly expressed information possible. Nonetheless, inadvertent errors can occur and applicable laws, rules, and regulations often change. Further, the information contained herein is intended to afford general guidelines of Capital Gains Tax. The application and impact of the law can vary widely, however, from case to case, based upon the specific or unique facts involved. Accordingly, the information, in this document is not intended to serve as legal, accounting, or tax advice. Users are encouraged to consult with their professional advisors for advice concerning specific matters before making any decisions. Dalnet Properties disclaim any responsibility for positions taken by taxpayers in their individual cases or for any misunderstanding on the part of the users.
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