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Capital Gains Tax and all you need to know

Capital Gains Tax (CGT) does not affect every single property transaction; however it is important that people who are looking to sell their property have an understanding of what it is and the repercussions thereof.

Though it was implemented a few decades ago in the global market, it was only introduced to South Africa in October 2001 and is loosely defined as a tax payable on capital gain that arises when you sell an asset on or after 1 October 2001 at a profit. It applies to natural persons, trusts, companies, closed corporations and non-South African tax-payers. There are however exclusions due to specific provisions which are found in the Eighth Schedule of the Income Tax Act, 1962 (the Act), which determines a taxable capital gain or assessed capital loss.

Experts say that many sales of primary residences will not be subject to CGT as the first R2 million of any capital gain or loss on the sale will not be regarded for CGT purposes as of 1st March 2012. A capital gain is not the amount that the property is sold for but it is sold price less base cost. Base cost constitutes original purchase price plus all costs incurred while selling the house (legal fees, transfer costs and duties, agent commission and other any other services rendered) and any costs incurred toward the improvement of the house (this excludes maintenance costs).

A primary residence is defined, according to the Act, as a property owned by a natural person. The owner or his/her spouse must ordinarily reside in the property as their main place of residence and it must also be chiefly used for domestic purposes. Where the property has been used for business purposes in the past, the exemption will be apportioned for the periods where the property was not utilised as a primary residence.

There are, however, some instances where the owner of the property will be seen as having been ordinarily resident for a continuous period of up to two years even if they have not been living in the primary residence during the said two-year period, provided the following conditions are applicable:

  • The primary residence was in the process of being sold while a new primary residence was acquired or was in the process of being acquired;
  • The primary residence has been accidentally rendered uninhabitable; and
  • The property was being built on land acquired for the purpose of erecting primary residence.

 

When the base cost of the property has been determined, SARS will then be able to calculate the CGT payable based on the net profit realised. Section 26A of the Act dictates that a taxable capital gain must be included in the seller’s taxable income and shall be taxed as per their income bracket. CGT is then payable when the natural person’s income tax return is submitted at the end of the financial year during which the property was sold. In the case where the primary residence is registered together in the names of the owner and spouse, they each would benefit from the residential exclusion according to their interests held in the residence. For example, if the share of the spouse is 50 percentile each, they would each qualify for a primary residence exclusion of R1 million provided they both use the property as primary residence. No exemption will apply on capital gain received on the sale of the natural person’s second or holiday home.

It is, however, advised that you seek professional advice from a certified tax consultant or conveyance attorney regarding CGT as tax matters can get complicated.