Capital Gains Tax – what’s the big deal? What are the exclusions?

If there’s money involved you can be sure that the South African Revenue Service (SARS) is all over it, like white on rice. Whether it’s money you’ve made from employment, or it’s retirement pay-outs or you made money off the sale of your assets, SARS wants to know about it because they want to claim their cut. This is Capital Gains Tax (CGT) and it forms part of your income tax. If you make a profit or a loss that qualifies for CGT, you will need to settle this liability with SARS in the assessment year that the loss or gain occurred. Fortunately, however, there are a number of CGT exclusions that apply so read on if CGT is something that you’re concerned about.

South African Capital Gains Tax

As mentioned, CGT is not a separate tax but forms part of your income tax. A capital gain arises when you dispose of an asset and for more than you originally paid for it.

The rules for capital gains tax are laid out in the Eighth Schedule to the Income Tax Act

• CGT is charged at a lower tax rate than ordinary income and gains or losses made before 1 October 2001 are not taken into account.
• A withholding tax applies to non-resident sellers of immovable property and the amount withheld by the buyer is basically an advance payment on the seller’s final income tax liability on that sale.
• Not all assets attract CGT and certain capital gains and losses are excluded.

Who is capital gains tax for?

CGT applies to individuals, trusts and companies in South Africa. A tax resident is liable for CGT on assets located worldwide and in South Africa.

A tax non-resident will only be charged capital gains tax on immovable property in South Africa or assets of a “permanent establishment” in South Africa. This is because certain indirect interests in immovable property (such as shares in a property company) are deemed to be immovable property and treated accordingly.

When does capital gains tax apply?

Events that qualify as a disposal (triggering a CGT liability) include – sale, donation, exchange, loss, death and emigration. However, there are some exclusions that apply:

• A R2 million gain (or loss) on the disposal of your primary residence
• Most of your personal use assets
• Your retirement benefits (although this could change)
• Payments relating to long-term insurance policies
• There is an annual exclusion granted to individuals and special trusts amounting to R40 000 for a capital gain or capital loss
• There is a small business exclusion of capital gains for individuals (who are at least 55 years old) of up to R1.8 million when disposing of a small business with a market value not exceeding R10 million
• An individual exclusion of R300 000 is applied in place of the R40 000 annual exclusion in the year of that individual’s death.

Although most personal use assets are excluded from CGT, the annual exclusion amount of R40 000 is intended to exclude smaller gains and losses. This is done for the purpose of reducing compliance costs and simplifying the tax administration relating to small gains and losses.

Did you know that there is a capital gains tax on emigrating from South Africa?

When you permanently relocate to another country from South Africa and complete the process of tax emigration to conclude your tax affairs in South Africa, you become a tax non-resident. In other words, you cease to be a tax resident in South Africa, and this change in tax status is a trigger event for CGT.

What happens when you cease to be a tax resident in South Africa?

• Your tax status changes from resident to non-resident, which means that SARS will now treat you differently.
• Your obligation to pay tax on your worldwide income is terminated, although you will still be taxed on locally sourced income.
• SARS takes this opportunity to tax you one last time before you exit the tax system, and treats you as if you disposed of all your worldwide assets at market value (essentially as if you sold them to your foreign self) the day before you ceased to be a tax resident, which triggers a Capital Gains Tax (CGT) liability.
• This CGT is added to your taxable income for that assessment period, which can push you into a higher tax bracket, which can be a shock if you’re not expecting it. Remember that you can use the R40 000 annual CGT exclusion to your favour here.
• This exit tax is payable to SARS, and the due date will be noted in your tax return.

Some things to note about tax residency and CGT

• The onus rests on you to notify SARS of your tax status change. You must do this in the same tax period in which the change takes place.
• Until you give SARS official notice of your status change and they acknowledge this change,  the tax authority can rightfully assume you are still a tax resident, and you will be liable for income tax in South Africa.
• If there is an exit tax payable when changing your tax status, SARS can charge you administrative penalties for non-declaration and non-payment. These penalties can go up to 200% in some cases.

FinGlobal: tax experts for South African expats

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Simply drop your contact details in the form below and we’ll be in touch to answer any questions you might have about capital gains tax in South Africa.