What exactly does CGT mean, and especially, for you as a home owner?

A new Capital Gains Tax (CGT) was introduced in South Africa, to bring the country in line with international practice. Minister of Finance, Trevor Manuel, announced this in his budget speech on 23 February 2000.

Why did the government introduce CGT?

• CGT exists in most first world countries such as USA, Canada, UK and Australia.
• The South African Revenue Service (SARS) was ready to implement CGT administration and collection because of improved computer systems and resources.
• CGT helps to widen the tax net in South Africa and give scope to reduce the burden of personal income taxes.
• It narrows any loopholes in the existing tax system, preventing companies from investing income into tax deductible new assets and avoiding tax by the transfer of immovable properties by close corporations and trusts.

Who has to pay CGT?

• Any natural person such as individuals and special trusts;
• Any legal entity including companies, close corporations and trusts; and
• South African residents who make a profit, or loss, when selling property of a capital nature.

What exactly does CGT mean for you and, more especially, for homeowners?

It means that taxpayers, including individuals, trusts, companies and close corporations, will be taxed on the profit they make when they sell an asset or property of a capital nature, usually where there is a change in ownership. It is then basically a tax on the resale of profits. In most cases, it does not affect one's primary residence, provided the property is smaller than two hectares and the profit made is less than R1 million. However, homeowners will be liable for CGT on second properties or holiday homes that are not occupied as a primary residence. It also affects all properties registered in the names of close corporations, trusts and companies.

How is a capital gain/loss determined?

It is the difference between the base cost of the asset and the amount for which it is sold.

How will the "base cost" of the asset be determined?

• The CGT Bill proposes that the base cost will be the expenditure made to own the asset, the cost of any improvements that are made to it and any other costs directly brought about by the sale of the asset. This base cost does not include any expenditure that may be claimed as an income tax deduction or any borrowing costs (interest on loans) or repairs.
• The taxpayer must be able to prove the base cost if no record exists. It is crucial for owners to keep records of any capital asset they have bought, including costs they spent on improving the asset.
• This element of CGT has sparked some controversy because it is felt that the effects of inflation on an asset's base cost have not been taken into account. In South Africa this ratio is high and it is felt that increases in value could often be attributed to inflation and not to real increases in value.
• The base cost is the actual capital cost and includes the cost of getting the asset. For example: agent's commission, legal fees, conveyancer fees, and the cost of improving the asset.

What is excluded from the base cost?

• The effects of inflation
• The cost of upkeep of the asset (maintenance and repairs, and insurance premium); and
• The devaluation of the asset caused by consumption, for example, the wear and tear on a motor vehicle.

For what period does CGT apply?

CGT only applies to gains attributable to the period from 1 October 2001 onwards, in cases where assets were owned before that date and parted with after that date. The Bill proposes two alternative methods to determine the value of the asset on 1 October 2001:

• Have the asset valued on 1 October 2001. Taxpayers have two years to do this. We suggest that you contact a professional property valuer or associated valuer (see further details below)  Time apportionment - calculate the asset's value, taking into account the entire time that the asset was owned. For example, if you bought a holiday house ten years ago for R350 000 and sell it in another five years' time for R950 000 the house has gained R600 000 in value in those 15 years. The gain attributable to the last five years is:

What is excluded from Capital Gains Tax?

• Primary residences owned in the name of an individual
• Individual's private motor vehicle (if not used for business)
• Personal belongings (art, antiques, clothing, stamp collection) and jewellery
• Proceeds from pension, provident, retirement annuity funds and life insurance policies
• Winnings from lotteries, casinos and prizes (if not a professional gambler)
• Compensation for injury, illness and defamation
• Profit (not more than R500 000) from the sale of a small business, pending retirement if: the taxpayer is older than 55 years; assets have been held longer than 15 years
• Gains made when changing foreign currency back into Rand after a trip overseas

What is included in Captial Gains Tax?

• Primary residences owned in the name of a company, close corporation or trust
• Individual holiday homes or second homes and properties let to tenants
• Boats, aircraft and caravans
• Shares, unit trusts and private investments, and second-hand policies
• Krugerrands or other silver or gold minted coins
• Sale of businesses
• All other assets, except those specifically excluded

What percentage of CGT is payable?

For legal persons, 50% of the net profit will attract CGT and for natural persons the amount is 25%. This portion of the net gain will in turn be taxed at the taxpayer's marginal tax rate. As an effective tax rate this means that individual taxpayers will pay a maximum effective rate of 10% and corporate taxpayers a maximum of 14.5%, and 20% for Trusts.

Example for natural persons:

• Natural person's maximum marginal tax rate is 40%
• Assuming the aggregate capital gain for the year of assessment is R25 000 . 25% of R25 000 is R6 250, which in turn is taxed at 40%, therefore R2 500 is payable. The R2 500 as a percentage of the original profit made is 10%.

Will there be any exemption?

Individuals and special trusts will not have to pay CGT on the first R10 000 of capital gains per year.

How will SARS be aware of profits made?

SARS's new computer software, the New Income Tax System (NITS), will interface with systems in the Deeds Registry, Motor Vehicle Registry, Johannesburg Stock Exchange (JSE) and financial institutions.

Contact details

For more tax related information contact your local SARS office, visit www.sars.gov.za or consult a tax advisor.

The South African Institute of Valuers can be contacted on (021) 762 3313 (Cape Town branch & General Secretary's Office), Gauteng branch on (012) 342-7574, KwaZulu Natal branch on (031) 309-7431 or at www.saiv.org.za or simply visit www.valuer.co.za for a link to the South African Council for Valuers, as well as other valuation firms.

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