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Capital Gains Tax (CGT)

This section is aimed at providing more information on the capital gains tax implications affecting residential properties. The calculation of CGT could be quite complex in certain circumstances and we therefore would like to point out that this section is intended to only provide a basic understanding of CGT. We recommend contacting your accountant to discuss the specific CGT implications pertaining to individual residential property transactions and proper tax planning relating to the acquisition of residential properties.

Liability for CGT

Capital Gains Tax came into effect on 1 October 2001 and applies to all SA residents (for tax purposes) and foreigners who own fixed property in South Africa.

It is therefore important to note that if you are a South African resident and own a property in any foreign country, you will be liable for CGT in South Africa when the property is sold for a profit. Some relief might however be available to you if you also incurred CGT in the country where the property is situated.

Non-SA residents are liable for CGT when a property situated in South Africa is sold. In addition, SA residents need to be aware of the implications of article 35A of the Income Tax Act: this section applies only to properties where the purchase price exceeds R2 million. If a SA resident buys a property from a foreigner, the onus is on the purchaser to withhold CGT upon settlement or the purchaser could be held personally liable for the tax.

The estate agent and conveyancor are responsible for informing the purchaser that the property is being acquired from a foreign resident. If these parties fail to do so, they can be held jointly liable for the tax which needed to be withheld, but the amount is limited to their fees charged for the transaction.

The amount of withholding tax is calculated based on a percentage of the selling price and the rate depends on the nature of the entity who sells the property - 5% for individuals, 7.5% for companies and 10% for trusts. The purchaser is responsible for paying the withholding tax over the SARS.

Calculation of Capital Gains & Losses

A capital gain or loss is calculated by deducting the base cost of an asset from its selling price. The base cost of a property consists of the sum of the property purchase price, capital costs incurred in improving the property (renovations), transfer costs paid when the property was acquired and costs directly related to selling the property (includes marketing costs, agents commission, etc.).

Finance costs like interest, bond repayments and bond registration & cancellation fees relate to the financing of the property and can therefore not be included in the base cost of an asset.

If the property being sold was used by an individual as a primary residence, the first R1.5 million (accurate for 2009 fiscal year) of the capital gain can be excluded for CGT purposes. This seems like a large amount, but most people tend to occupy their primary residences for a number of years and property owners therefore have to realise that a property of R1 million only has to grow by 9.6% per annum for 10 years and a property of R1.5 million only by 7.1% for 10 years to result in a capital gain above this exclusion amount.

It is therefore imperative to keep proper account of all capital costs incurred while living in your primary residence because you would have to produce supporting documentation when adding these amounts to your base cost and it could end up saving you thousands of Rand. This applies even more to buy to let properties as there is no primary residence exemption on these type of properties.

Please note: the primary residence exclusion does not apply to companies, closed corporations and trusts. The decision to register a primary residence in the name of one of these types of entities could therefore result in a higher CGT liability.

Lastly, there is also an annual CGT exclusion for individuals of R16,000 (accurate for the 2009 fiscal year) which relates to all capital gains, not just residential properties.

Calculation of CGT

Capital Gains Tax is not a separate tax but forms part of the assessment of income tax by SARS. A portion of capital gains is therefore included in the entity's income tax assessment in the year in which the property is sold.

For individuals, 25% of the net capital gain on all assets sold is included in the income tax calculation and taxed based on a sliding scale applicable to income tax for individuals. For companies, closed corporations and trusts, 50% of the net capital gains is included and taxed at the applicable income tax rates.

This means that the effective capital gains tax rate for individuals is a maximum of 10% (25% of the maximum marginal tax rate of 40% for individuals), while companies and closed corporations would have a fixed effective CGT rate of 14% (50% of the corporations tax rate of 28% (accurate for 2009 fiscal year)). The effective CGT rate for trusts would be 20% (50% of income tax rate of 40%).

If the capital gain of a trust is not retained in the trust, but distributed to the beneficiaries of the trust, the capital gain will in most cases be taxed in the beneficiaries hands which will therefore result in a lower effective CGT percentage. Trust structures could however be quite complicated and we therefore recommend discussing your tax planning structures with your accountant to ensure that this is applicable to your circumstances.

Please note: capital losses are netted off against the capital gains realised in a specific income tax period, but if the result is a net capital loss it cannot be deducted in the calculation of income tax and is instead carried over to the next year for deduction against future capital gains.