Let’s talk about Capital Gains Tax for a hot minute. Also called CGT here in SA, this tax means that if you sell an asset and make a profit, the South African Revenue Service (SARS) wants to know about it. Why? Because they want their cut of the capital gain. As such, CGT is part of your income tax, which you’ll need to sort out when you file your returns. While this sounds intimidating, the good news is that there are quite a few situations where you don’t have to pay CGT, thanks to various exemptions.

This article will break down those capital gains tax exemptions for you and then look at how the rules differ for tax purposes for South African residents versus non-residents. Let’s keep it simple, so you can clearly understand what you need to know.

What is Capital Gains Tax in South Africa?

Capital Gains Tax (CGT) is applied to the profit you make when selling an asset for more than its purchase price. This applies to asset sales occurring after October 1, 2001.

Here’s what you must know about how CGT works in South Africa

What is capital gains tax?

CGT is part of income tax: Instead of being a separate tax levied separately, capital gains tax is integrated into your annual income tax assessment.

• Any applicable capital gains are factored into the calculation of your annual income tax, affecting your overall tax liability.
• You don’t file a separate CGT return; it’s included in your standard income tax return submitted to SARS.

How does capital gains tax work in South Africa?

It’s important to note that the entire amount of the capital gain is not taxed. A CGT inclusion rate is applied to determine how much of the gain will be added to your taxable income.

• Individuals: Only 40% of the calculated capital gain is added to your taxable income. If you made a R100,000 capital gain, only R40,000 would be included in your income tax calculation.
• Companies and Trusts: A higher inclusion rate of 80% for capital gains tax applies. Therefore, if a company or trust makes a R100,000 capital gain, R80,000 is added to their taxable income.

What is the capital gains tax rate in South Africa?

The portion of the capital gain included in your income (based on the inclusion rate) is then taxed at your applicable income tax rate.

• This means the final amount of CGT you pay depends on your income tax bracket. Individuals with higher incomes will pay a higher CGT, as their overall income tax rate is higher.
• For example, if an individual is in the 40% tax bracket, the R40,000 capital gain included in the example above will be taxed at that 40% rate.

Okay, but how does capital gains tax work?

Let’s break down how CGT works in practice, step by step.

Step 1: Figure out your capital gain: This is simply the profit you made. You calculate it by taking the price you sold the asset for (which is the market value on the sale date) and subtracting what you originally paid for it. Remember to include any expenses that increased the asset’s value, like improvements, or costs related to the sale, such as agent fees.

Step 2: Apply the CGT inclusion rate: Only a portion of your capital gain is included in your income tax calculations.

• For individuals, that portion is 40% of the gain.
• For companies and trusts, it’s a higher 80%.

Step 3: Calculate the taxable amount: The portion of the gain that you just calculated in step 2 is then added to your other taxable income for the year. This total taxable income is what SARS uses to calculate how much income tax you owe.

Step 4: Pay the CGT: The CGT is then paid at your normal income tax rate. So, the percentage of tax you pay on that portion of the gain depends on your income tax bracket.

When does capital gains tax apply?

Events that qualify as disposals (triggering a CGT liability) include sale, donation, exchange, loss, death, and tax emigration.

When does capital gains tax not apply?

As mentioned above, specific CGT exclusions or exemptions can reduce or eliminate your capital gains tax liability.

1. Primary residence exclusion: When you sell your main home, you can exclude up to R2 million of gain (or loss).
2. Personal use assets: Most everyday personal items, like your car or furniture, are exempt from CGT.
3. Retirement benefits: Typically, retirement payouts are handled under a different tax system, not CGT (though this might change).
4. Long-term insurance policies: Certain payments from long-term insurance policies are also excluded.
5. Annual exclusion: Individuals and special trusts get an annual R40,000 exclusion for capital gains or losses. This helps with smaller transactions.
6. Small business exclusion: If you’re an individual aged 55 or older, you might qualify for a R1.8 million exclusion when selling a small business valued under R10 million.
7. Estate exclusion: The year someone passes away, their estate gets a R300,000 exclusion, instead of the standard R40,000.

While most personal use assets are exempt, the R40,000 annual exclusion is there to simplify things. You don’t have to worry about CGT on small gains or losses, which reduces the overall paperwork and tax burden for SARS. They’re only interested in big-ticket items.

Resident vs non-resident for tax purposes: how does CGT differ?

South African tax residents face a much broader CGT liability, while non-residents are primarily concerned with assets directly tied to South Africa.

South African tax residents—worldwide assets: South African tax residents are liable for CGT on the disposal of assets located anywhere in the world. This means that if you’re a resident, even if you sell an asset located overseas, it could be subject to South African CGT.

While the scope of CGT liability is broad, covering a wide range of asset disposals, tax residents generally have access to the full range of CGT exemptions. This includes the primary residence exclusion, annual exclusion, and small business exclusion.

Non-residents – South African-sourced assets: Non-residents are generally only liable for

CGT on the disposal of assets considered to be South African-sourced. This typically includes:

• Immovable property (real estate) located in South Africa.
• Assets related to a “permanent establishment” (like a branch or office) within South Africa.
• Specific indirect interests in immovable property, such as shares in a property holding company.

The scope of CGT liability is much narrower than that of residents, and accordingly, non-residents have limited access to CGT exemptions. For example, the primary residence exclusion typically does not apply to non-residents. When a non-resident sells immovable property in South Africa, the buyer may apply a withholding tax, which is essentially an advance payment on the potential CGT liability.

Read more: Will you pay Capital Gains Tax when inheriting and selling a property in South Africa?

FinGlobal: cross-border tax specialists for South African expats

Capital Gains Tax can be stressful. The best way to ensure you’re handling it correctly is to call the professionals. FinGlobal provides specialised support for individuals looking to manage their tax emigration from South Africa, and we’re ready to streamline your financial transition and optimise your tax position. We also offer services relating to tax refunds, international money transfers, retirement annuity withdrawals and more.

To get the ball rolling and learn how we can take care of your capital gains tax stresses, please submit your contact details below, and we’ll be in touch.