CAPITAL GAINS TAX
These notes are for discussion purposes only and do not purport to contain a complete summary of the Capital Gains Tax provisions. For more detailed queries, please consult your professional advisers.
Up until 1 October 2001, South Africans were taxed only on their income. From 1 October 2001 (the "effective date"), we will now also be taxed on the profit we make when disposing of a capital asset.
RATES OF CAPITAL GAINS TAX ("CGT")
CGT only taxes the profit one makes on an asset when it is disposed of, and not the entire value of the asset.
Natural persons and special trusts will be required to include 25% of their capital gain in their taxable income.
Companies, close corporations and ordinary Trusts will be required to include 50% of their capital gain in their taxable income.
The present maximum marginal rate of income tax for individuals is 42%, for companies and close corporations 30% and for Trusts 32% up to R100 000 and 42% above R100 000 income. Therefore, individuals will pay a maximum of 10.5% of the capital gain, companies and close corporations a maximum of 15% and Trusts a maximum of 21%.
Capital losses may be set off against capital gains and may be carried forward to subsequent years of assessment.
For natural persons, the first R10 000 of their capital gain or loss in any year of assessment will be exempt and thus disregarded. This figure increases to R50 000 in the year in which the natural person dies.
AFFECTED AND EXEMPT ASSETS
With a few exceptions (see below), almost all assets will be subject to CGT, including immovable property, intellectual property, investments such as shares and unit trusts and the vested rights of beneficiaries in Trusts.
The following assets will be exempt:
1.) Personal use assets, such as furniture and motor vehicles (but not including aircraft weighing more than 450 kg or boats in excess of 10m in length).
2.) Retirement benefits (for a period of at least 3 years).
3.) Compensation for personal injury, illness or defamation.
4.) Prize money, including lotteries and gambling.
5.) Sale of a small business by a natural person over 55 years (first R500 000 excluded).
6.) Unit trust funds.
7.) Conversion of foreign currency when returning from overseas travel.
8.) Trading assets, such as stock in trade.
9.) Donations to public benefit organisations.
CALCULATING THE CAPITAL GAIN
A capital gain is calculated by deducting the base cost of the asset from the proceeds on disposal of the asset.
The following may be included in base cost:
1. The costs of acquiring the asset, including the purchase price, transfer costs, transfer duty, VAT and professional fees (e.g. attorneys and surveyors).
2. The costs of improvements, alterations, renovations, etc.
3. The costs of disposing of the asset, including agent's commission, advertising costs, valuation costs and professional fees.
One is not entitled to deduct expenditure on repairs, maintenance, insurance and rates and taxes.
For assets acquired before 1 October 2001, the following methods of valuing the asset as at that date may be used:
PRIMARY RESIDENCE EXCLUSION
1.) The asset's fair market value as at 1 October 2001. The valuation must be carried out within 2 years from the effective date (i.e. before 30 September 2003).
The Act does not prescribe who may perform the valuation. The taxpayer may employ any third party to assist in the valuation or may elect to value the asset himself or herself. The proviso, however, is that the onus of substantiating the valuation rests with the taxpayer. The valuation workings should therefore reflect the procedure for carrying out the valuation as well as the particular method used. In this regard, working papers should be retained.
The valuation must be lodged with the taxpayer's income tax return in the year in which the asset is disposed of and must take the form of Annexure "A" annexed hereto. It should be noted that, in terms of Footnote 1 to the form, all documentation substantiating the valuation, including working papers, must be retained by the taxpayer for a period of 4 years from the date of submission of the valuation.
2.) The time-apportionment base cost, i.e. the percentage of the total gain that was made after 1 October 2001.
3.) Where no fair market valuation was submitted and no accurate records maintained, the value as at 1 October 2001 will be deemed to be 20% of the proceeds on disposal.
The primary residence exclusion will apply only to natural persons and special trusts. Upon disposal of a primary residence (on land not exceeding 2 hectares),
any capital gains or losses up to R1-m can be excluded. This will not apply to properties registered in companies, close corporations or Trusts.
When only part of the residence is used for residential and part for business purposes, an apportionment must be done. Likewise, where the residence is occupied for a part period, an apportionment must be done but, where the residence was not inhabited because it was being offered for sale or was being erected or renovated or had been rendered accidentally uninhabitable, the exemption will apply for a period not exceeding two years.
If the owner is employed or trading more than 250km from his or her residence and lets it for a period not exceeding 5 years, the exemption will apply if the owner lived in the premises for a continuous period of at lease 1 year prior to and after the letting period and does not treat any other residence as his or her primary residence during that period.
Where more than one person holds an interest in a primary residence (e.g. spouses married to each other out of community of property), the exclusion will be in proportion to the interest held by each party in the residence.
The exemption applies to any real or statutory right in a residence or in land, shares in a shareblock company and a right of use or occupation.
The legislation makes provision for individuals to transfer properties back from companies, close corporations and Trusts into their own names free of transfer duty as well as free of stamp duty in respect of the registration, substitution or cession of a mortgage bond or transfer of shares in a share block company. The requirements to qualify for this exemption are as follows:
1.) The residence must be acquired by an individual and must, after the transfer takes place, constitute that individual's primary residence.
2.) The acquisition of the property by the individual must take place after 20 June 2001 (the date of promulgation of the Act), but before 30 September 2002.
3.) The registration of the transfer must take place on or before 31 March 2003.
4). In the case of a company or close corporation, the individual and/or his or her spouse must have held all of the equity share capital of the company or member's interest in the close corporation from 5 April 2001
until the date of registration of the transfer. (The exemption will not apply where the property is held by a subsidiary company).
5.) In the case of a Trust, the individual must have either disposed of the property to the Trust by way of donation, settlement or other disposition or must have financed all the expenditure actually incurred by the Trust to acquire and to improve the residence.
6.) In both of the abovementioned cases, the individual and/or his or her spouse must have ordinarily resided in the residence and used it mainly for domestic purposes from 5 April 2001 until the date of registration of the transfer.
Individuals should be cautioned against hasty decisions to make use of the exemption to transfer properties into their own names as the potential saving in CGT should be weighed up against the transfer duty advantages of having a property registered in the name of a company or close corporation as well as the advantage of protection against creditors afforded by these entities. In addition, the Trust remains one of the most useful tools in reducing the value of a taxpayer's dutiable estate for estate duty purposes by pegging the value of growth assets in the estate and through the use of tax-free annual donations to reduce the value of loan accounts. It should also be noted that CGT is a tax only on the gain which has accrued after 1 October 2001, while estate duty is a tax on the full value of the property. Taxpayers are advised to engage in a comprehensive estate planning exercise prior to making a decision as to whether or not to avail themselves of the primary residence exemption.
CGT ON DEATH
The rate of Estate Duty was reduced from 25% to 20% with effect from 1 October 2001. However, on death, all of the individual's assets are deemed to be disposed of at market value on the day before the person dies and are subject to CGT (with an exemption of R50 000)