What is Capital Gains Tax?

Capital Gains Tax
What is Capital Gains Tax?
The basic concept is that if a capital item (property) is sold at a profit then the profit amount if subject to CGT
General
•    CGT Introduced on 1 October 2001;
•    Regulated in Scheduled 8 of Income Tax Act;
•    All RSA Residents – regardless where the property is situated;
•    Non RSA Citizens – Property in South Africa;
•    Entities liable for CGT
•    Natural Persons
•    Companies
•    Close Corporations
•    Trusts
Who is Liable for CGT and when must it be paid?
1.    Residents
•    CGT is applicable to any capital asset of a South African Resident (asset that is owned in any part of the world)
2.    Non Residents (tell your clients to register for tax and de-register after transfer)
•    CGT is applicable to the following:
•    Fixed property in SA
•    Any interest or right in immovable property situated in SA
•    Assets connected with a SA permanent establishment of the non-resident
CGT is payable
•    Where there is a disposal of a capital asset
•    Disposal
•    Sell
•    Donate
•    Exchange
•    Deemed Disposal
•    Shares
•    Immovable property
Calculation of CGT
Capital gain or Capital Loss = proceeds from the sale of the capital assets (or deemed disposals – when you die- you need to pay estate tax to the master – it is in the name of the person who has died) less Base cost of asset less – Annual Exclusion
X the rate of inclusion
= Capital gain included the Taxable Income and taxed at the company or individual tax rate
•    CGT is triggered by a disposal of an asset
•    A capital gain or loss is the difference between the proceeds & base cost (purchase price) – including all costs (improvements) occurred acquiring and improving the asset;
•    Base cost for assets:
•    Acquired before Oct 2001 – value determined at that date plus expenditure after that date;
•    Acquired after Oct 2001 – accrual costs in incurred in acquiring or creating the asset;

•    Base cost is reduced by amounts included in normal tax computation, e.g. Repairs (amount tax deductible) and maintenance – NB!!! (renovations – add value)
•    All gains and losses are calculated and the net amount is included in the income of the taxpayer at the inclusion rate;
How are “proceeds” calculated?
•    Selling Price minus Commission
How to calculate Capital Gain
•    Capital Gain (Profit) is the amount by which:
•    The Proceed exceeds
•    The base cost
•    Minus the annual exclusion
How does date of acquisition influence base cost
•    After 1 October 2001
•    Calculation
•    Before 1 October 2001
•    Valuation (before 4 September 2004)
•    Time apportionment formula in Act
Onus of proof on tax payer
Calculation the base cost?
•    Cost of asset on acquisition (Purchase price)
•    Plus costs directly related to acquisition
•    Transfer fees
•    Transfer Duty
•    Cost of a Valuation
•    Plus cost to improve asset
•    Pool
•    Jacuzzi

The Primary residence exemption
•    Applies to natural person and special trusts; (don’t put your primary- (personal) house into a trust – you will lose the benefit – R 30 000(annual exclusion – Natural Person) ( R 300 000 in Year of Death – Natural Person)
•    If the primary residence is disposed of by the resident;
•    First R 2 million of the profit is excluded
•    This is only applicable to SA residents
•    The exemption may be apportioned in certain cases;
How to calculate CGT
•    Percentage of CGT (Inclusionary rate);
•    Is added to the taxpayers income;
•    Taxpayers then pay income tax on that portion of the Capital Gain;
Calculation of CGT
Two factors
•    Portion of Capital Gain ( inclusionary rate) is added to income
X
•    Income tax rate
•    Natural Persons (Marginal Rate)
•    Juristic persons ( Statutory flat rate)
= Effective CGT Rate
Inclusionary Rate
Percentage of Capital Gain added to income
•    Close Corporation        - 66.6%
•    Trust                - 66.6%
Income Tax Rates
•    Natural Person             0 – 45% Marginal Rate
•    Company            28% Statutory flat rate
•    Close Corporation        28% Statutory flat rate
•    Trust                45% Statutory flat rate

Rate – Different entities pay CGT
A – Natural Person (0- 13.653%)
•    33.3% of Capital Gain (Inclusion)
X
•    0 – 45% Income Tax (Marginal rate)
=
•    0 – 13.653% CGT (Effective rate)
•    Thus a Maximum of 13.653% of Capital Gain Tax)
B – Companies & Close Corporations (18.48%)
•    66.6% of Capital Gain ( Inclusionary rate)
X
•    28% Income Tax (Statutory flat rate)
=
•    18.48% CGT (Effective rate)
Thus
•    (18.48% of Capital Gain)
C – Trusts (27.31%)
•    66.6% of Capital Gain (Inclusionary Rate)
X
•    45% Income Tax (Statutory flat rate)
=
•    27.31% CGT (Effective rate)
Thus (27.31% of Capital Gain) 
When must the CGT be paid?
•    Transfer Duty  - Before registration
•    VAT  - 1st Vat return after registration
•    Income Tax – End of Financial Year after registration
•    Capital Gains Tax – end of Financial Year after Registration

Very Important!!
•    Don’t include furniture in the purchase price – client will have to pay CGT on the furniture – if you do include it, you need to specify it and both buyer and seller needs to be aware of it.
•    Transfer duty, government duty, commission is all deductible from CGT. (PART OF YOUR COSTS)