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Capital gains tax - A brief guide to the new legistlation
What is Capital Gains tax?
A transaction-based tax where realised or deemed capital gains / losses are brought into account on an annual basis by way of inclusion in your income tax return. The effective implementation date -1 October 2001.
What does capital gains tax mean to the taxpayer?
Until the date of implementation, you are taxed on the income you earn from owning assets, but not on the profits arising from the disposal of the assets. After the effective date all capital gains / losses made on the disposal of capital assets will be subject to Capital Gains Tax unless excluded by specific provisions. Tax is only payable on the capital gain after the implementation date.
What assets will be subject to Capital Gains Tax?
Property of any kind, including assets that are movable or immovable, tangible or intangible, subject to certain specific exclusions (trading stock and mining assets).
Who is liable to pay Capital Gains Tax?
South African residents and entities (companies, CC's and Trusts) held both inside and outside South Africa. For non-resident individuals and entities, a Capital Gains tax liability will arise where a Capital Gains tax event occurs in respect of immovable property / interests in immovable property in RSA, or where assets of any permanent establishment / fixed base in RSA through which a trade, profession or vocation is being carried on.
How do you determine the capital gain / loss?
This is the difference between the base cost of the asset and the consideration realised / deemed to be realised on the disposal / deemed disposal of the asset. Base cost of an asset includes those costs incurred in acquiring, enhancing or disposing of the Asset (legal fees, agent's commission, stamp duty, transfer duty, conveyancing fees, advertising costs, valuation costs etc) VAT paid (which has not been claimed or deferred) may form part of base cost.
Current costs such as interest, repairs, insurance premiums, rates and taxes (normal revenue expenses) may not form part of Base cost.
Capital losses may only be deducted against capital gains and may not be offset against income from other sources.
A primary exemption of R1 000 a year applies to all chargeable net capital gains / losses for all capital assets disposed of by a natural person during the course of the tax year.
"Personal use" assets (those not used for business purposes) e.g. boat, a caravan loses value as a result of personal consumption. Accordingly, where a capital loss arises on disposal of a personal asset, the loss is not permitted. Where a capital gain arises, only the portion in excess of the base cost is subject to Capital Gains tax. Net capital losses exceeding R1 000 may be carried forward to future years of assessment.
From a planning point of view, you would obviously want to have your base cost as high as possible, but for estate duty you would like to have your asset valued as low as possible e.g. a farmer may be able to use fair market value for Capital Gains tax purposes but Land Bank value for estate duty purposes. The onus is on the taxpayer to prove the value of the asset. If you do not have a valuation on 1 October 2001 of assets acquired before this date, SARS will use a time-based apportionment method of valuation. One has to be very careful with such valuations, as SARS will scrutinise all transactions where valuations have been inflated (by more than 20%). Where SARS rejects the valuation, a minimum of 40% on the difference in tax payable will be levied.
When is Capital Gains Tax triggered?
On the disposal / deemed disposal of an asset. Disposal can occur when an asset is:
- Given away
- Redeemed or cancelled
- Disposal would include where a natural person or legal person ceases to be resident in RSA or where the beneficial interest in a trust changes.
- Your primary or principal owner-occupied residence (must be owned by a natural person)
- Private motor vehicles
- Personal belongings and effects
- Compensation for personal injury or illness, and;
- Prizes from betting, lottery or competitions
What constitutes a primary or principal residence?
Uncertainty over :
- Land owned that is adjacent to a residence
What constitutes a homestead in respect of a farm?
Partial use of a residence for business purposes
The identification of the primary / principal owner - occupied residence where a taxpayer resides in more than one centre during the course of a year.
How are gains included in taxable income?
The following inclusion rate applies to net capital gain :
- Legal persons - (companies, trusts, CC's) - 50% of net capital gain is taxable income (50% exempt from tax).
- Individuals - 25% of net capital gain is taxable income (75% is exempt). Usually individuals are taxed at a maximum marginal rate of 42%.
In the case of individuals, a primary exclusion of R1 000 per year applies.
Depending on a person's marginal tax rate, the effective rate can therefore be between 0 - 10%.
Companies 15% and trusts 20%.
Records must be kept
Records must be kept for four years from the date the SARS acknowledges receipt of your income tax return reflecting the disposal of the asset. The onus of providing base costs rests with the taxpayer. A clear distinction must be drawn between capital assets acquired before the implementation date. Where there is no proof of base cost for capital assets acquired before the implementation date, 20% of the proceeds upon realisation will be deemed to be the base cost for capital gains tax purposes. Where the asset was acquired after the implementation date and no record of base cost has been kept, the base cost will be deemed to be nil.
What information should be kept?
Details of the date of acquisition of the asset, date of disposal, market valuations and consideration for disposal. Practically this means keeping documents such as copies of contracts of sale and purchase and all invoices and receipts.
Capital Gains Tax as it affects property law
On acquiring a property, base costs include :
- Purchase price
- Transfer duty
- Stamp duty
- Legal fees for contract preparation
- Valuation fees