When does Capital Gains Tax (CGT) apply?
CGT applies to the profit that you make on the sale of a property .
What percentage of the capital gain must be included in taxable income for the year in which the property is sold?
Where properties are owned by individuals or special trusts, 33 percent of the capital gain must be included in the taxable income for the years 2013 to 2015 (and 25% for 2013 and earlier). The present maximum marginal rate of income tax for individuals is 41 percent, which means that individuals will pay a maximum of 13.65 percent of the capital gain.
Where properties are owned by companies, close corporations or ordinary trusts, 66 percent of the capital gain must be included in the taxable income. The income tax rate for companies and close corporations is 28 percent and these entities will therefore pay 18.65 percent of the capital gain in taxes, while trusts, whose income tax rate is 41 percent, will pay 27.31 percent of the capital gain.
What happens if a capital loss is made on property sale?
A loss may be offset against any capital gains that are made in that year of the assessment. However, if no capital gains are made, the loss may be carried forward to subsequent years of assessment.
For individuals, the first R30 000 of the capital gain or loss in any year of assessment will be disregarded. This figure increases to R300 000 in a year in which the individual dies.
Are non-residents liable for the payment of CGT?
Yes. Foreigners 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 percent in the share capital of a company where 80 percent 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 a property from the proceeds of the disposal of the property. Disposal includes a sale, donation, exchange, vestment in a beneficiary of a trust, or emigration. The following are included in the base cost:
- The cost of acquiring a property, including the purchase price, transfer cost, transfer duty, VAT and professional fees.
- The costs of improvements, alterations, renovations and so forth. This will only be accepted if you have receipts or invoices.
- The cost of disposing of the property, including the 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 is not included in base costs.
It is thus essential to maintain accurate records of these costs. If records are not kept, no deduction will be allowed from the proceeds to determine the capital gain. Records must be kept for four 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. This exclusion only applies to natural persons and special trusts. Upon disposal of a primary residence (on land not exceeding two hectares) only capital gains or losses of up to R2-million are excluded. The exclusion does apply to properties that are registered to companies, close corporations or trusts.
Where are taxable capital gains included in the basic reduction formula?
In terms of the revised definition of “taxable income”, together with section 26A of the Income Tax Act, the basic reduction formula has changed to:
- Gross income – Exemptions = Income
- Deductions + Taxable capital gain = Taxable income
In the case of a couple that is married in community of property, will a capital gain on an investment in the name of one of the partners be regarded as a capital gain accruing to both partners? In other words, can the capital gain be spread between the two partners as is the case with interest earned? If the answer is “no”, should investments that are likely to incur a capital gain when disposed of not be transferred to the partner who has the lower marginal tax rate?
Where a partner married in community of property disposes of an asset, the disposal is treated as having been made in equal shares by each partner. The gain or loss is therefore spread equally between the partners.
An exception to this general rule is the case where the asset was excluded from the joint estate, in which case the gain or loss is solely attributable to the partner disposing of the asset.
A partner in this situation, or perhaps a partner married out of community of property, may well be tempted to transfer the asset to the partner with the lowest marginal tax rate in order to take advantage of that rate. However, the provisions of paragraph 68 of the Eighth Schedule permit the SA Revenue Service to disregard that transfer if the main purpose is to reduce, postpone or avoid the payment of tax and to attribute the gain back to the partner that originally owned the asset.
Can an assessed loss – as opposed to an assessed capital loss – be set off against a taxable capital gain?
Yes. Some commentators have questioned this point because a taxable capital gain is included in taxable income. The definition of taxable income provides as follows:
“taxable income” means the aggregate of:
(a) the amount remaining after deducting from the income of any person all the amounts allowed under Part I of Chapter II to be deducted from or set off against such income
(b) all amounts to be included or deemed to be included in the taxable income of any person in terms of the Act
Taxable income can be a negative figure. Paragraph (a) would become negative when the amounts allowed in terms of Part I of Chapter II exceed the income of a person. Furthermore, Part I of Chapter II includes s 20 which deals with assessed losses.
The intention of the legislature can also be seen from the amendments to s 103(2) which provides that a ‘tainted’ capital gain cannot be set off against an assessed loss. These amendments would not have been necessary if a taxable capital gain could not be set off against an assessed loss.
Will the sale of my primary home be subject to CGT?
The first R2-million of gain or loss on disposal of a primary residence must be disregarded. Thus if the primary residence is sold for a gain of R2.5-million, the first R2-million is excluded and the remaining R500 000 is subject to CGT. This concession, known as the primary residence exclusion, means that most individuals are not subject to CGT on the sale of their home.
What is a primary residence?
A residence must meet certain basic requirements before it may be considered a primary residence:
- It must be a structure, including a boat, caravan or mobile home, which is used as a place of residence by a natural person.
- A natural person or special trust must own an interest in the residence.
- The natural person with an interest in the residence, beneficiary of the special trust, or spouse of that person or beneficiary must ordinarily reside in the home and must use it mainly for domestic purposes as his or her ordinary residence.
- A person may not claim the primary residence exclusion for more than one residence at a time.
Where the primary residence is disposed of together with the land on which it is situated (including unconsolidated adjacent land) the R2-million exclusion will apply to land:
- To the extent that it does not exceed two hectares.
- That is used mainly for domestic and private purposes together with the residence, and is disposed of at the same time and to the same person as the residence.
If a residence is held through a company or a trust, the owner is not a natural person. However, the estate planning, limited liability, or other considerations that led to the property being placed in a company or trust may outweigh the advantage of the primary residence exclusion.
What happens if I dispose of my primary residence in a joint estate and have a capital gain in excess of R2-million?
Where a property is sold that falls within the joint estate of spouses married in community of property, the disposal will be treated as having been made in equal shares by each spouse and the primary residence exclusion will be apportioned between them
What happens if I do not ordinarily reside in my home?
You will be treated as having been ordinarily resident in your primary residence if you were not ordinarily resident during a period not exceeding two years if:
- Your old primary residence was in the process of being sold while a new primary residence was acquired or was in the process of being acquired.
- Your new home was undergoing renovation or improvement prior to your taking up residence.
- Your home was being built on land acquired for the purpose of being your primary residence.
- Your primary residence had been accidentally rendered uninhabitable.
A residence is treated as having been used for domestic purposes during any continuous period of absence there from while the residence is being let under the following circumstances:
- The residence must not be let for more than five years.
- You or your spouse resided in the residence for a continuous period of at least one year prior to and one year after period of absence.
- You treated no other residence as a primary residence during your absence.
- You were temporarily absent from SA or employed or engaged in carrying on business in SA at a location further than 250km from that residence.
I work in Johannesburg where I bought a townhouse to stay in. My wife and three children still stay in Umtata, where I have my main home. Will the sale of my townhouse qualify for the primary exclusion when I move back to Umtata?
You will have to choose which of the two residences is to be regarded as your primary residence. If you choose the townhouse then the proceeds from the sale of the townhouse would qualify for the primary exclusion. However, should you later dispose of your house in Umtata, any capital gain or loss on disposal would be subject to CGT for the period that you stayed in your townhouse.
I own a flat via shares in a share block company. I reside in the flat when on holiday, and rent it out the rest of the year. What will the CGT implications be if I sell my shares in the share block company?
The capital gain made on the sale of the shares will be subject to CGT as the flat will not qualify as a primary residence.
I have three wives in terms of customary law. My wives stay in three different homes that I own. Which home is my primary residence for CGT purposes?
Following the coming into force of the recognition of Customary Marriages Act, 120 of 1999, each of your wives is recognised as a spouse. You will have to choose which of the three residences is to be regarded as your primary residence.
If a salaried employee owns a house that he lives in and owns a second property that is let out, is he liable for CGT on the second property? The same scenario, but assume the taxpayer gives the tenant notice on the second property and then moves into it. He then advertises the second place for sale. Is he liable for capital gains tax on the second property when he sells it? Is there a period that a person must live in a property for it to be classified as his permanent residence?
Yes. He will be liable for CGT in respect of the period for which he let out the residence. Assume the taxpayer let out the property from 1 October, 2001, to 30 September, 2002, and then lived in the residence for another two years before selling it. He will be liable for CGT in respect of one third of the capital gain on the disposal of the property. There is no minimum period that a person must live in a residence to claim it as his primary residence. However, a taxpayer must be able to convince the SA Revenue Service that the residence is his or her ordinary residence. A taxpayer who buys and sells properties at short intervals runs the risk of being classified as a trader in properties, in which case any profits on disposal will be taxed in full.
I bought a property that is smaller than two hectares, in 1980, for R98 000. We have lived in the house and maintained it, and have done improvements amounting to R152 000 over the last 20 years. The current market value is R3 500 000. Would I be liable for CGT if I sold the property for R4 250 000 five years after valuation date?
There are three possible methods for determining the gain on this property.
Proceeds R4 250 000
Market value R3 500 000
Gain R 750 000
Time apportionment base cost
Proceeds R4 250 000
Time apportionment base cost * R3 450 000
Gain R 800 000
20% of proceeds
Proceeds R4 250 000
20% R 850 000
Gain R3 400 000
You are permitted to select any one of these three formulas. You would not be liable for CGT on the disposal of the residence in the first two cases, as the first R1.5-million of any gain or loss in respect of a primary residence is disregarded for CGT purposes. Note that the market value method of determining the base cost will only be available to you if you valued the residence and completed the prescribed valuation form on or before 30 September, 2004, and completed the prescribed valuation form.
A couple lives on a boat, which is their primary residence. Will they be exempt from CGT if they sell the boat or will SARS seek to tax any gain on disposal?
A boat that is used as a place of residence by an individual is specifically included in the definition of residence, as are a mobile home and a caravan. A boat will therefore qualify for a primary residence exclusion on the same basis as a more conventional residence.
Is the primary residence exclusion of R2-million subject to apportionment?
One has to first calculate the overall capital gain or loss on sale of the residence. Next you must work out what portion of that gain or loss relates to the primary residence. For example, if 10% of the residence was used as a home office, and there was a capital gain of R2 500 000, then the capital gain attributable to the primary residence is R2 250 000 (R2 500 000 x 90%) and the R2 million exclusion is applied in full against this figure. So R250 000 (the portion of the gain not covered by the R2 million exclusion) and R250 000 (the portion of the capital gain which is not in respect of a primary residence) would be subject to CGT. The only time that the R2-million is apportioned is when more than one person has an interest in a residence. For example, if husband and wife each own 50% of a residence then they will each only be entitled to R1 000 000.
More than 50% of my home is used for business purposes. Do I qualify for the R2-million exclusion?
No. A primary residence must be used mainly for domestic purposes.