CAPITAL GAINS TAX ON SALE OF PROPERTY

What is meant by a Capital Gain?

 A person’s capital gain on an asset disposed of is the amount by which the proceeds exceed the base cost of that asset.

What is the base cost?

The base cost of an asset is what was paid for it, plus the expenditure in respect thereof. The following can be included in calculating the base cost, but supporting documentation must be kept for five years from the date of disposal:

• The cost of acquiring the property, including the purchase price, transfer cost, transfer duty and professional fees, e.g. attorneys fees and fees paid to a surveyor and auctioneer.
• The cost of improvements, alterations and renovations (not maintenance) which can be proved by invoices and /or receipts.
• The cost of disposing of the property, e.g. advertising costs, costs of obtaining a valuation for capital gains purposes, and estate agents commission.

How is base cost calculated of assets held before 1 October 2001?

If the property was acquired before 1 October 2001, one of the following methods can be used to value the property:

• 20{31fc6f1f044649ba2b612cdcc51b4f95d98f47a1e9704295258ff593f29362d5} x (proceeds less expenditure incurred on or after 1 October 2001).
• The market value of the asset as at 1 October 2001, which valuation must have been obtained before 30 September 2004.
• Time – apportionment base cost method.

Original cost + (proceeds – original cost) x number of years held before 1 October 2001 ÷ the number of years held before 1 October 2001 + number of years held after 1 October 2001.

How is Capital Gains Tax paid?

Capital Gains Tax is not a separate tax from income tax. Part of the capital gain is included in taxable income. It is then subject to normal tax. A portion of the total of the taxpayer’s capital gain less capital losses for the year is included in the taxpayer’s taxable income and taxed in terms of normal tax tables. The year of assessment will be the tax year in which the suspensive conditions are fulfilled.

How is Capital Gain calculated?

For an individual, the first R40 000 of your total capital gain will be disregarded. Then 40{31fc6f1f044649ba2b612cdcc51b4f95d98f47a1e9704295258ff593f29362d5} of the capital gain made on disposal of the property must be included in the taxable income for the year of assessment in which the property is sold. When the property is owned by a company, a close corporation or an ordinary trust, 80{31fc6f1f044649ba2b612cdcc51b4f95d98f47a1e9704295258ff593f29362d5} of the capital gain must be included in the entity’s taxable income.

Primary residence and Capital Gains Tax

As from 1 March 2012 the first R2 million of any capital gain on the sale of a primary residence is exempt from Capital Gains Tax. This exemption only applies where the property is registered in the name of an individual or in the name of a special trust. The property should furthermore not exceed 2 hectares. The owner must be ordinarily resident in South Africa to be able have a primary residence here.

If the property is used partially for residential and partially for business purposes an apportionment must be done.

If more than one person holds an interest in a primary residence, the exclusion will be in proportion to the interest held by each party. For example, if you and your spouse have an equal interest in the primary residence, you will each qualify for a primary residence exclusion of R1 million. You will also be entitled to the annual exclusion, currently R40 000.

If the property was occupied as a primary residence for part of the period of ownership, an apportionment must be done however an exemption applies for a maximum period of two years if the property was not occupied due to it being offered for sale, it being in the process of construction, repair or renovation. Moreover, an owner who works more than 250 km from the residence and rents it out for a period not exceeding five years will be exempt from the apportionment requirement provided the owner occupied the premises for at least 1 year prior to – and after the tenancy and does not treat any other property as a primary residence during that period.

“ Whilst all reasonable steps are taken to ensure the accuracy and integrity of information provided, no liability or responsibility whatsoever is accepted if information or data is, for whatever reason, incorrect. The information does not constitute proper legal advice and should not be relied upon for that purpose.”