Understanding Capital Gains Tax (CGT) is vital for future South African expats. This complex tax is levied on the profit made when selling an asset for more than its purchase price and with specific implications for those leaving South Africa, particularly the deemed disposal or so called “exit tax,” CGT can significantly impact your financial planning.
That’s why we’d like to spend the next few minutes with you, demystifying CGT, explaining how it works, how it applies to property and giving you a rundown of what to expect and consider, as an expat. So put the kettle on, make a cuppa and let’s take a look at Capital Gains Tax.
What is Capital Gains Tax in South Africa?
Capital Gains Tax (CGT) is a tax imposed on the profit (or gain) you make when you sell an asset for more than you paid for it. This tax applies to various assets that are disposed of after 1 October 2001.
Some things to note about CGT in South Africa:
- It is not a separate tax: CGT is part of income tax.
- Inclusion rate: Only a portion of the capital gain is taxed. This is 40% for individuals and 80% for companies and trusts.
- Tax rate: The tax you pay depends on your overall income tax rate.
How does Capital Gains Tax work?
Step 1: Calculate the capital gain: This is the difference between the selling price (this equals the market value at the specific date) and the original purchase price (adjusted for expenses like improvements or agent fees).
Step 2: Apply the inclusion rate: Only a portion of the capital gain is subject to tax. For individuals, this is 40%, while for companies and trusts, it’s 80%.
Step 3: Determine the taxable amount: The included portion of the capital gain is added to your taxable income.
Step 4: Pay the tax: You pay CGT at your normal income tax rate.
Read more:
- What is Capital Gains Tax and when do South Africans pay it?
- Capital Gains Tax – what’s the big deal? What are the exclusions?
- Capital Gains Tax on shares held in South Africa by individuals.
- South African unit trusts: do you pay capital gains tax on unit trusts?
How to calculate Capital Gains Tax when you emigrate from South Africa
If Capital Gains Tax is triggered when you dispose of a qualifying asset, what does it have to do with tax emigration from South Africa? Well, emigration is one of the trigger events for Capital Gains Tax, as it is considered a deemed disposal by the South African Revenue Service (SARS). When you leave South Africa permanently, SARS treats you as if you sold all of your worldwide assets at market value on day one or before your effective cessation date.
Although you might not have physically disposed of any of your assets, you are deemed to have done so and for all intents and purposes, you are deemed to have sold your worldwide assets to your foreign self, which makes you liable for Capital Gains Tax on those assets. Because this tax is triggered by you leaving the country, it has become known as an “exit tax” as it is essentially SARS’ last opportunity to tax you before you become a non-resident. After becoming a non-resident, you will only be liable for Capital Gains Tax on the sale of immovable property remaining in South Africa.
Read more: Tips on how to manage capital gains tax on emigration from South Africa.
What is the Capital Gains Tax on property in South Africa?
Capital Gains Tax (CGT) applies to the profit made when you sell a property for more than you purchased it for. If you still hold property in South Africa, this will not be included as part of the calculation for your exit tax upon tax emigration, but it will be taxed when you do eventually sell.
Here’s what you need to know about Capital Gains Tax and property in South Africa:
- The primary residence exemption
R2 million exclusion: You may be eligible for a R2 million exemption on the capital gain if the property was your primary residence. Important to note that this exclusion is awarded per property and not per individual. - Partial exemption: If the property wasn’t your primary residence for the entire ownership period, the R2 million exemption is apportioned accordingly.
Capital Gains Tax implications for emigrants:
Selling your property in the same tax year as your emigration can have significant tax consequences.
- Combined tax burden: The combination of CGT and exit tax can push you into a higher tax bracket.
Maximising the R2 million exemption as an emigrant
- Property on the market: If you list your primary residence for sale before emigrating, it may still qualify as your primary residence for up to two years while it remains on the market.
- Rental income: Renting out your property before emigration will disqualify it as a primary residence, preventing you from claiming the R2 million exemption. However avoiding rental income means your property becomes available and will trigger the need for TRC requirements.
How is Capital Gains Tax calculated on property in South Africa?
- If the capital gain exceeds R2 million, only 40% of the gain is included in your taxable income for individuals (80% for companies and trusts), and the tax rate you will pay depends on your overall income tax rate.
- Other factors, like the date of purchase, improvements made to the property, and whether you used the property for business purposes can affect the Capital Gains Tax calculation.
Example of how Capital Gains Tax works when selling property:
If you sell your primary residence for R3 million, and you bought it for R1 million, your capital gain is R2 million. Since this is exactly the primary residence exemption, you won’t pay any CGT in SA.
However, if you sell it for R3.5 million, your capital gain is R2.5 million. Only R500,000 exceeds the exemption. 40% of this (R184 000) is included in your taxable income, and the CGT you pay will depend on your income tax bracket.
Read more: Four things you need to know about selling your south african property as an expat.
What is the Capital Gains Tax on inherited property in South Africa?
As a beneficiary, there is no Capital Gains Tax for you to pay on assets left to you by a deceased estate in South Africa upon inheritance. You will only be taxed when you sell the property, and this tax will be withheld from you, before you receive the proceeds from the sale.
Read more:
- Understanding withholding tax in South Africa: A guide for non-residents.
- Will you pay Capital Gains Tax when inheriting and selling a property in South Africa?
FinGlobal: tax specialists for South African expats
Capital Gains Tax can be confusing and complicated. That’s why it’s best to call in the experts to handle it for you. FinGlobal is ready to offer expert advice on your tax emigration from South Africa, helping you every step of the way to streamline your financial transition and minimise your tax obligations. We can also assist you with tax clearance, tax refunds, foreign exchange and more.
To get started with your free, no-strings-attached financial and tax assessment, leave your contact details below and one of our expert consultants will be in touch soon.
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