1. What is Capital Gains Tax?
1.1 Capital Gains Tax, “CGT”, is a tax imposed on the capital gains for a year of assessment in respect of an asset disposed of, included in the taxpayer’s taxable income for the year of assessment which is then in question.
1.2 CGT affects those who are resident or partially resident in South Africa. Foreign persons fall into the CGT net where they have immovable property in South Africa, including any interests or right (e.g. A usufruct) in that immovable property.
1.3 Capital gains is equal to the difference between the proceeds (in other words the amount for which the property has been bought) and the base costs (the amount that has been paid for the purchase of the property).
2. What is the Rate of Capital Gains Tax?
2.1 In the case of a natural person or special trust the rate will be 40 % of the net capital gain for that year of assessment.
2.2 In any other case (trusts, companies and small business corporations) 80 % of the net capital gain for that year of assessment.
3. Annual Exclusions
3.1 The annual exclusion of a natural person or special trust is R40 000.00, per year of assessment and not for each capital gain transaction.
3.2 Where the person dies during the year of assessment the annual exclusion for the year will be R300 000.00.
3.3 Close corporations, companies and trusts do not qualify for any exclusions.
4. When is Capital Gains Tax Payable?
The Capital Gains Tax will be added to the person’s income tax during the year in which the gain took place. For example, if the date on which the gain took place is 10 October 2016, the gain will be taxable in the income tax return ending 28 February 2017.
5. Can a Capital Loss be Carried Forward to the Next Year of Assessment?
Yes, if no capital gain is made in the year of assessment, the capital loss will be carried forward to the next year of assessment. A capital loss can only be deducted against a capital gain. The capital loss will be carried forward until a capital gain is made.
6. Is a Private Residence (“Primary Residence”) Subject to Capital Gains Tax?
6.1 Yes, if the profit made on the property exceeds R2 million. In other words, the first R2 million of the profit on the sale of a private residence is exempt from capital gains tax. Every rand of the profit exceeding R2 million is subject to capital gains tax.
6.2 Where a primary residence and the land on which it is situated is disposed of by a person, such person must disregard so much of a capital gain or loss as does not exceed R2 million in respect of so much of that land, including unconsolidated adjacent land, as-
- Does not exceed two hectares;
- Is used mainly for domestic purposes together with that residence; and
- Is disposed of at the same time and to the same person as that residence.
In other words, should the property be larger than two hectares, the capital gain on the area that exceeds two hectares will be subject to capital gains tax.
6.3 If a certain portion is used for business (trade) purposes, for example an office or study, the portion of the capital gain (or capital loss) relating to that part will be subject to capital gains tax.
7. Is a Second Home, Time Share or Holiday Home Excluded from Capital Gains Tax?
No, capital gains tax will be levied when a second home, time share or holiday home is sold, provided that a capital gain is made.
8. Section 35a of the Income Tax Act – Withholding Tax
8.1 The Eighth Schedule to the Income Tax Act 58 of 1962 provides that non-residents are only liable to capital gains tax on the disposal of immovable property owned by them directly or any interest in immovable property comprising 20 % or more in the equity share capital of a company, if 80 % or more of the value of the net assets of that company is attributable directly or indirectly to immovable property located in South Africa. As a result, those persons that are not tax residents in South Africa are only liable to capital gains tax on the disposal of immovable property owned directly or indirectly in South Africa.
8.2 Section 35A of the Income Tax Act deals with the withholding of tax in respect of non-residents who dispose of property in South Africa. It places an obligation on any purchaser who pays consideration in excess of R2 million to a non-resident seller (or to any other person on behalf of that seller) of any immovable property in South Africa, to, withhold from that consideration (purchase price), an amount equal to –
- 5 % of the purchase price, in the case where the seller is a natural person;
- 7,5 % of the purchase price, in the case where the seller is a company or close corporation; and
- 10 % of the purchase price, in the case where the seller is a trust.
8.3 The amount withheld by the purchaser must be paid to SARS and is treated as an advance in respect of that non-resident seller’s liability for normal tax for the year of assessment during which that immovable property is disposed of by that non-resident seller. The withheld purchase price must be paid to SARS within 14 days after the date on which the amount was withheld from the consideration due to the seller, or if the purchaser is also a non-resident, within 28 days.
8.4 Section 35A(7) provides that if the purchaser knows, or should reasonably have known that the seller is not a resident, and he fails to withhold the amount required, the purchaser becomes personally liable for the payment of the amount of tax that should have been paid to SARS.
8.5 If a purchaser fails to pay the required amount to SARS within the period allowed for payment, that purchaser is liable for the interest at the prescribed rate on any amount outstanding. Furthermore, the purchaser can be liable to pay a penalty of 10 % of the amount of withholding tax that should have been paid over to SARS.
8.6 The conveyancer and estate agent have an obligation to inform the purchaser, in writing of the fact that the seller is a non-resident for tax purposes in South Africa before any payment is made to the seller and that section 35A may apply to the transaction under consideration. If the estate agent or conveyancer knows or reasonably should have known that the seller is a non-resident and fails to comply with the legal obligations, that estate agent or conveyancer will be jointly and severally liable for the payment of the amount which the purchaser is required to withhold and pay over to SARS under the Act. The liability of the estate agent or conveyancer is, however, restricted to the amount of remuneration or other payments receivable in respect of services rendered relating to the disposal of the immovable property by the seller or the registration of transfer.
8.7 The responsibility of the purchaser to withhold is lessened or removed where the seller obtains a directive from the Commissioner for SARS that no amount or a reduced amount maybe withheld and provides this directive to the purchaser before the expiry of the period allowed for payment. Section 35A provides that SARS may issue a directive where the seller furnishes security to SARS for the payment of the capital gains tax due on disposal of the immovable property or by having regard to the extent of the seller’s assets located in South Africa. Furthermore, SARS will also issue a directive as to whether the seller is indeed subject to tax in South Africa on the disposal of immovable property. In addition, a non-resident seller may not be subject to capital gains tax in South Africa by virtue of a double taxation agreement concluded by South Africa with the seller’s home country.
8.8 Section 35A prescribes that the purchaser must submit a declaration in the form prescribed by SARS together with the payment of the tax due.