CAPITAL GAINS TAX FOR INDIVIDUALS

INTRODUCTION In his budget speech of 23 February 2000 the Minister of Finance, Mr. Trevor Manuel announced the introduction of Capital Gains Tax (CGT) in South Africa. Internationally, the idea of such tax is not uncommon, with many of our trading partners having implemented CGT decades ago.

Before the implementation of CGT, you were taxed on the ordinary income you earned from owning assets, but were not generally taxed on profits arising from the disposal of those assets. The effect of CGT is that all capital gains and losses made on the disposal of assets will be subject to CGT unless excluded by specific provisions.

In order to give effect to the proposals relating to CGT, an Eighth Schedule has been added in the Income Tax Act. The schedule determines a taxable gain or loss and a new section 26A of the principal Act provides that the taxable gain is included in taxable income. The date from which capital gains will be taxed is 1 October 2001.

Should this guide not answer your specific question, you should contact your local SARS office or make use of the e-mail facility, namely cgt@sars.gov.za.

DO I HAVE TO REGISTER FOR CGT?

No, CGT will only be triggered on the disposal of an asset. The taxable gain will then form part of your taxable income and must be included in your Income Tax Return for the year of assessment in which the disposal occurred. If you are not registered for Income Tax, (SITE only taxpayer), an abridged return will be available for completion and subsequent submission.

SOME IMPORTANT DEFINITIONS

WHAT IS MEANT BY A DISPOSAL? A wide meaning has been given to the concept of disposal. The following are examples of events that will be regarded as disposals-

• a sale of an asset
• donation of an asset
• the loss or destruction of an asset

EXCLUSIONS

Certain assets are excluded from CGT. Some of the important exclusions to note are- • A primary residence (R1 million of gain or loss) • Most personal belongings and effects such as motor vehicles, furniture, etc. • Proceeds from an endowment policy or life insurance policy (unless it is a second hand policy). • Compensation for personal injury or illness • Prizes / winnings from a South African competition e.g. National Lottery.

CAPITAL GAIN OR LOSSES

A person’s capital gain in respect of 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.

EXAMPLE

Loss Gain Proceeds R10 000 Proceeds R 10 000 Base Cost R 20 000 Base Cost R 5 000 Capital Loss (R10 000) Capital Gain R 5 000

BASE COST

The base cost of an asset is generally the expenditure actually incurred in acquiring an asset together with expenditure directly related to the acquisition or disposal of an asset or to improve the asset. The base cost does not include any amount otherwise allowed as a deduction for income tax purposes. Some of the main costs that may form part of the base cost of an asset are -

• Expenditure to acquire the asset.
• Transfer costs, stamp duty.
• Advertising cost to find a seller or a buyer.
• Cost of improvements to an asset.
• Cost of the valuation of the asset for the purpose of calculating a capital gain or loss in respect of the asset.
• Cost directly related to the acquisition, creation or disposal of that asset e.g. fees paid to a surveyor, auctioneer, accountant, broker, agent, consultant or legal advisor for services rendered.
• VAT paid and not claimed or refunded on asset
• Cost of establishing, maintaining or defending a legal title or right in that asset
• Cost of moving the asset from one location to another (on acquisition)
• Cost of installation of that asset, including the cost of foundations and supporting structures

WHAT IS THE BASE COST OF ASSETS HELD BEFORE 1 OCTOBER 2001?

In order to exclude the portion of the gain relating to the period before 1 October 201 any one of the following options may be used.

- 20% of the proceeds upon realisation can be deemed to be the base cost (no records kept);

OR

- Market value of the asset, as at 1 October 2001, which is called the valuation date. (The valuation must be done before 30 September 2003)

OR

- Time apportionment method. The calculation must be done as follows:

ORIGINAL COST + GAIN X PERIOD BEFORE VALUATION DATE PERIOD HELD BEFORE AND AFTER VALUATION

Note: Where there is a loss, the formula will reduce the original cost by the portion of the loss relating to the period before the valuation date. Where no records have been kept, methods 1 or 2 must be used.

EXAMPLE: TIME APPORTIONMENT

An individual taxpayer acquired a holiday home for R450 000 four years before the valuation date. The taxpayer had the property for 5 years when he decided to sell the property for R800 000. The taxpayer had the property valued at valuation date and the market value of the property at that time, was R500 000.

Proceeds 800 000 Less Base cost 730 000 Acquisition cost 450 000 Time Apportionment adjustment * 280 000 Capital Gain R70 000 * R800 000(Proceeds) – R450 000(Costs) X 4(Years before valuation date) 5 (Years before and after valuation date) = R350 000 x 4/5 = R280 000

ANNUAL EXCLUSIONS

The annual exclusion of a natural person in respect of a year of assessment is R10 000. Where a person dies during the year of assessment, that person’s annual exclusion for that year is increased to R50 000.

TAXABLE CAPITAL GAIN

A person’s taxable capital gain for the year of assessment is- (a) in the case of an individual, 25% of the net capital gain for that year of assessment (b) Companies and trusts will be taxed on 50% of the net capital gain for that year of assessment.

EXAMPLE OF CGT

An individual taxpayer acquired shares (or units in a unit trust) for investment purposes 6 months after the implementation of CGT for R10 000 and disposed of all those shares 2 years later for R30 000. Disposal - Sale of shares Exclusion - Not applicable, shares or unit trusts disposed of are not specifically exempt. Gain - Proceeds 30 000 Less base cost 10 000 Gain R20 000 Annual Exclusion - The exclusion of R10 000 is applicable to a natural person Therefore : 20 000 - 10 000 (Exclusion) 10 000 x 25% (Inclusion rate) R2 500 The taxable capital gain of R2500 must be included in normal taxable income.

PRIMARY RESIDENCE Will the sale of my private residence be subject to capital gains tax? The primary residence exclusion means that most capital gains on the sale of a home will not be subject to CGT. What is a "primary residence"? There are two basic requirements, which must be met before a home may be considered a primary residence:

• it must be owned by a natural person (not a trust, company, or close corporation) and
• The owner or spouse of the owner must ordinarily reside in the home and must also use the home for domestic or private residential purposes. When will the sale of my primary residence, be subjected to CGT? You will be taxed on a capital gain if one of the following apply to the sale of your residence:
• If the capital gain or loss on the sale of the residence exceeds R1 million, the portion that exceeds a million will be subjected to CGT.
• Where the property is larger than 2 hectares, the area that exceeds 2 hectares will be subjected to CGT
• No exclusion from CGT will be allowed, in respect of a period on or after valuation date (1 October 2001), when the person was not ordinarily resident in the primary residence.
• The exclusion will not be allowed in respect of that part of a primary residence, that has been used for the carrying on of a trade, after the valuation date (1 October 2001) e.g. use of a study for business purposes.

Example: An individual taxpayer’s residence is valued at R1 200 000 on 1 October 2001. The residence is sold on 1 December 2001 for R1 400 000.

• Proceeds 1 400 000
• Valuation date value 1 200 000
• Valuation fee 5 000
• Swimming pool added in November 2001 45 000
• Proceeds 1 400 000
• Less Base Cost
• Valuation date value 1 200 000
• Valuation fee 5 000
• Improvements 45 000 1 250 000
• GAIN R 150 000

The gain is less than R1 million and therefore exempt from CGT. (Should the taxpayer sell the residence for R2.4 million the gain would be R1.15 million. R150 000 would therefore be subjected to CGT)

What happens if I do not ordinarily reside in my home, as I have moved before selling it, I am still building a home on a new property, or for some other reason?

You will be treated as having been ordinarily resident for a continuous period of up to 2 years, if you were not ordinarily resident during that period, for any of the following reasons:

• Your old home was in the process of being sold, whilst a new primary residence was acquired or was in the process of being acquired;
• Your home was being built on land acquired for the purpose of being your primary residence;
• The primary residence had been accidentally rendered uninhabitable

What happens if my spouse and I hold our primary residence jointly?

The R1 million primary residence exclusion is divided according to the interest each of you holds in the primary residence. As an example, if you and your spouse have an equal interest in your primary residence, you will each qualify for a primary residence exclusion of R500 000.