What is the Capital Gains Tax?
The Capital Gains Tax (CGT) in South Africa is the tax levied on the sale of an investment or property. Whether the sale resulted in a gain or a loss, the action still involved the disposal of an asset which is why the transaction is still subject to CGT. The assets of someone who just passed away is also subject to CGT.
If a property is purchased with the intention of generating a profit from it, the return is counted as revenue. However, if it was purchased as a financial investment, it would count as capital. This is where it gets tricky.
To avoid confusion, you should always keep proof of your objective for buying a property. Holding it as a form of long-term investment with the aim of capital growth is an acceptable way for the South African Revenue Service (SARS) to consider it for capital gains tax. Other than this, the property will be subjected to normal revenue tax.
SARS performs a number of tests to determine what type of tax a property sale should be subjected to. You can enjoy a limited exemption from paying capital gains tax if the sale is made on your primary residence. The first R2 million gain on the property is exempted from CGT computation. So, if you sold your primary residence for R3 million, only the R1 million in excess of the exemption would be subject to taxation.
Individual taxpayers, companies, trusts, and corporations are all subject to capital gains tax in South Africa the moment they sell a property or an asset. Non-residents are still subject to CGT if they sell their property situated in SA.
How to Calculate Capital Gains Tax in South Africa
The CGT uses October 1, 2001 as its valuation date which is the same date when the system was established. Gains made on property sale from this date are subject to CGT. The capital gains tax rate of a property is calculated from the valuation date – that is, October 2001 – up to the date of sale.
Capital gain is determined by deducting the amount you paid (the base cost) in purchasing the property from the proceeds of selling it.
The following items are included in computing the base cost of a property:
- Purchase price, transfer cost, VAT, transfer duty, and professional fees are all included in the computation.
- Improvements, renovations, and alterations may be accepted as long as you have receipts and purchase to prove these activities.
- Expenses in disposing of the property, including advertising costs, agent commissions, professional fees, and valuation costs.
Always keep a record of these transactions if you want them to be counted as an exemption in the computation.
The cost of repairing and maintaining the property are not discounted from the computation of taxable sales. Insurance costs and taxes are also not included in computing the base cost of the property. Aside from these, you’re also eligible to get the annual exclusion for a natural person which amounts to R40 000.
To better illustrate this explanation, let’s look at an example on how capital gains tax calculations are done.
Let’s say you bought a house for R3 million as your primary residence. You renovated it and years later, you managed to sell it for R6 million. The difference between the base cost and the proceeds of sale is R3 million. This is your capital gain.
You added a gazebo and renovated your garden, costing you R200 000. As discussed above, this can be added to the base cost of your purchase. Subtracting this from R3 million, you only now have R2.8 million in gain.
Remember the annual exclusion of R40 000? You can subtract this from the remaining capital gain, bringing it down to only R2 760 000.
Since you sold your primary residence, you’re eligible for the R2 million exemption. Subtracting this amount, the remaining R760 000 will be the one used to compute the capital gains tax you have to pay.
This 2018, the proposed capital gains tax rate for individuals is 18%. Using this value, you may be paying around R136 800 in taxes.
This is just a rough estimation. The actual computation may be more complicated which is why it would be better to use a calculator. You can use a capital gains tax calculator available online to determine how much CGT you have to pay for the sale of your property.
For lump sum payments of your capital gains tax, you can get a tax directive from SARS. A tax directive is a notice from SARS allowing the deduction of a fixed amount from the lump sum payment made by an individual.
How long does it take to get a tax directive from SARS?
SARS takes around 2 business days to process the request and issue a tax directive. It takes longer if the application is done manually. In this case, SARS will take a minimum of 21 business days before they issue the tax directive.