There are many different Capital Gains Tax (CGT) theories and opinions, but when this tax is analysed, it is not so daunting or complicated.
Everyone is liable for CGT when they sell their fixed assets or following the death of the asset owner. CGT is a transaction based tax where gains or losses are brought to account annually by inclusion in the tax payer’s annual income tax return.
The effective date of implementing this tax was 1 October 2001 at which stage a valuation should have been done of your property, and it then applies to the disposal of an asset on or after that date. Any profits accrued from this date onwards on the sale of specific capital assets will be taxed with CGT. Normal rental income from a property is revenue which is declared on your annual income statement and therefore not subject to CGT.
As capital gains are in general taxed at a rate lower than revenue, the investor needs to ensure they keep proof of their objective of buying the asset to avoid the normal revenue tax. When submitting your annual income tax return, any gains or losses based on a transaction during that period must be declared and submitted. This is where the confusion can occur and it is up to the taxpayer to prove that certain sums were capital and not revenue.
For instance, if a property was intentionally bought with the idea of generating a profit, it would be considered as revenue. But if the intention was as a financial investment, this would be capital. SARS is quite at liberty to question the objectives of the investor if there are frequent property transactions and might very well consider this as a revenue tax. If the homeowner keeps the property for personal long-term capital growth, SARS will see any profit on this as a capital gain.
Hutchison says SARS can be contacted if any doubt exists, but if homeowners understand the basic difference between capital and revenue gain then at least half the battle is won, as everyone always strives to keep their payable tax to a minimum. He says SARS could monitor the manner in which the property was paid for to ensure the buyer was intending a long-term capital gain.
There are many tax structures that SARS implements to determine whether to implement a capital or revenue tax, he explains. For instance, if the buyer bought a home for personal use (primary residence) this will be exempt from CGT, with certain limitations. SARS considers the first R2 million gain on the sale of a primary home as CGT exempt. Homeowners who use part of the home for business may be liable for different tax structures.
There are two basic requirements which must be met before a home may be considered a primary residence, namely, it must be owned by a natural person, not a trust, company or close corporation; and the owner or spouse of the owner must reside in the home as his or her main residence and must use the home mainly for domestic purposes.
Most primary residence sales will not be subject to CGT because the first R2 million of any capital gain or loss on the sale is disregarded for CGT purposes. This means that you need to make a capital gain of more than R2 million in order to be subject to CGT. Before 1 March 2012, the primary residence exclusion was R1.5 million and before 1 March 2006, it was R1 million.
In addition, if the proceeds on disposal of a primary residence do not exceed R2 million, any resulting capital gain or loss must be disregarded (this rule is subject to certain conditions, for example, no part of the residence must have been used for the purposes of trade).
The primary residence exclusion does not apply to the portion of a capital gain or loss that relates to a period on or after the valuation date (1 October 2001), in which a person or his or her spouse was not ordinarily resident in a primary residence.
The primary residence exclusion does not apply to the portion of a capital gain or loss that relates to any part of the primary residence that is used for the purposes of trade. This would apply, for example, if you use your study as an office for business purposes.
What happens if you and your spouse hold a primary residence jointly?
The primary residence exclusion of R2 million is divided according to the interest each of you holds in the primary residence. For example, if you and your spouse have an equal interest in your primary residence, you will each qualify for a primary residence exclusion of R1 million. You will also each be entitled to the annual exclusion (2013: R30 000).
What is meant by a capital gain or capital loss?
A person’s capital gain on an asset disposed of is the amount by which the proceeds exceed the base cost of that asset. A capital loss is equal to the amount by which the base cost of the asset exceeds the proceeds (base cost is made up of valuation date value, the valuation fee, improvements, etc.).