If you’re not prepared for it, Capital Gains Tax (CGT) can be a nasty shock to the system. Let’s take a look at what Capital Gains Tax is, when you’d have to pay it and how the CGT calculation works in South Africa.
Capital Gains Tax explained
What is CGT in simple terms?
Introduced in South Africa with effect from1 October 2001 (aka the “valuation date”), Capital Gains Tax is a levy charged by the South African Revenue Service (SARS) on the disposal of an asset on or after this valuation date.
- All capital gains and capital lossesmade on your disposal of assets will be subject to CGT unless there is a specific Capital Gains Tax exemption that applies.
- The Income Tax Act of 1962 lists the CGT provisions which indicate a taxable capital gain or assessed capital loss.
- Section 26A of the Act states that a taxable capital gain falls within your taxable income, which essentially means that CGT is not a separate tax but part of your income tax. Therefore, you do not have to register separately for Capital Gains Tax.
- Capital Gains Tax is triggered when you make a profit selling an asset that you own. This CGT tax is calculated on the profit you make and not the amount you sold it for.
- Capital Gains Tax must be paid by individuals, trusts and companies; and as a South African tax resident you will be expected to pay CGT on both worldwide assets and home-based assets.
- Non-residents in South Africa only find themselves liable for Capital Gains Tax on their immovable property located in the Republic.
Asset Exclusions: Is there a Capital Gains Tax exemption?
Certain assets are not subject to capital gains and losses on disposal. Some of the important Capital Gains Tax exemptions include:
- Assets for personal use: These are your personal belongings such as a motor vehicle or a caravan; your art or stamp collections; furniture and household appliances as well as other assets that are used primarily for a non-commercial purpose, except for immovable property and financial instruments (like shares, and cryptocurrency).
- Boats and aircraft: Where the boat does not exceed 10 metres in length and where the aircraft has an empty mass of 450 kilograms or less.
- Retirement lump sum payments: Payouts from your pension, pension preservation, provident, provident preservation and retirement annuity funds (as long as they are approved retirement funds) are not subject to Capital Gains Tax because they are taxed separately by SARS.
- Policy proceeds: Payouts from an endowment policy or life insurance policy are excluded from CGT, unless it is a secondhand or foreign policy.
- Compensation: Payouts for personal injury, disability or illness will not be subject to Capital Gains Tax.
- Prizes and winnings: Payouts from gambling, games or competitions regulated and authorised by South African gambling/gaming laws are excluded. (Example: National Lottery winnings)
- Donations or bequests: Any donations or bequests of your assets made to an approved public benefit organisation/NPO will not be subject to Capital Gains Tax.
- Foreign company interests: Disposal of an interest of at least 10% in a foreign company is exempt from Capital Gains Tax.
- Receipt of certain land restitution claims: Compensation may be in the form of a restitution of a right to land, an award or compensation, and is exempt from CGT.
- Tax-free investment: As long as it falls under section 12T(8) of the Income Tax Act, it’s not subject to CGT.
- Some CGT exemptions are capped at a specified amount, such as:
- The small business asset exclusion: limited to R1,8 million during a person’s lifetime); and
- The primary residence exclusion: limited to R2 million per primary residence).
How to calculate Capital Gains Tax
To work out your capital gain:
- Take the original purchase price of the asset (the price you paid)
- Add any improvements or capital expenditure (things you did to improve the value of the assets)
- Take that amount off the selling price (after deducting selling costs)
- The final number will be your capital gain amount.
For example, you purchased Asset X at R100,000 on 2 October 2001 and spent R50,000 on asset improvements. You then sold Asset X at R200,000, which means that your capital gain on the disposal would be R50,000.
Calculating Capital Gains Tax: capital gain or capital loss?
- Your capital gain is the amount by which the profit exceeds the base cost of the asset.
- A capital loss is the amount by which the base cost of the asset exceeds the profit.
Becoming a non-resident for tax purposes: say hello to Capital Gains Tax!
- When South African resident taxpayers become non-resident for tax purposes (where they fail to meet the ordinarily resident or physical presence tests) they could become liable to pay CGT.
- When you are no longer a tax resident, the Income Tax Act states that you will be deemed to have disposed of all your assets the day before cessation of tax residency.
- This means that SARS assumes you have disposed of your assets at market value on that day, and that these assets were then bought again at market value, which gives the new base cost when those assets are sold in the future.
Confused? Don’t be. It’s not important whether or not the assets were sold, as the sale is deemed to have taken place for the purposes of capital gains tax calculation, with the exception of immovable property in SA.
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