Capital Gains Tax

Fixed properties owned by the South African taxpayer are usually long term investments. In these circumstances the proceeds received from the sale of fixed property comprise capital receipts which are currently exempt from taxation.

As part of the ongoing program of tax reform in South African, Capital Gains Tax (“CGT”) was implemented on 1 October 2001.

 

Who will pay CGT (Capital Gains Tax)?

  • South African resident taxpayers will be liable for CGT on any gain made from the sale of their world-wide assets;
  • Non-South African resident taxpayers will be liable for CGT on any gain made from the sale of the following assets situated in South Africa:
    – Immovable property and any interest in or right to that immovable property; and/or
    – Assets of a permanent establishment, branch or agency situated in South Africa.

When is CGT levied?

CGT will be levied on disposal of an affected asset. “Disposal” will occur where an asset is sold, donated, scrapped, exchanged, cancelled, lost, destroyed or redeemed, as well as where:

  • An interest in an asset of a trust is vested in a beneficiary;
  • An asset is distributed by a company to a shareholder; or
  • An option is granted in respect of an asset.

Are there any exclusions from CGT ?

It would seem that the fiscus does not want to recover CGT from an individual’s personal assets and residence. In addition to a basic annual Primary exclusion of R20000, the inclusions and exemptions from CGT can be summarised as follows:

Exclude

  • Capital gains realised from the sale of an individual’s primary residence
  • Capital gains from the sale on an individual’s motor vehicle (if not used for business purposes), personal effects, jewellery, small craft and light aircraft
  • Proceeds from pension, provident, retirement annuity funds and life insurance policies (excluding second-hand policies)
  • Winnings from lotteries, casinos, prizes etc (if not a professional gambler)
  • Capital gains (not exceeding R500 000) from sale of small business and/or assets due to retirement ( at least 55 years of age) or ill-health, and the gross asset value is less than R5million, the exclusion is once off R900000.00 (2008 to 2011 R750000.00; 2007 R500000.00)

Include

  • Capital gains realised from the sale of an individual’s second home or holiday home
  • Capital gains from the sale of share, unit trusts, other private investments, second-hand policies and Krugerrands
  • Capital gains from sale of business

Note:

The primary residence exclusion is of particular relevance to the individual taxpayer and the following concepts within the legislation should be note.

  • The exclusion is limited to the first one and a half million rand of capital gain from the sale of a primary residence.
  • A taxpayer may only own one primary residence and must reside in the residence.
  • Under certain circumstances the taxpayer may leave the primary residence prior to sale thereof without losing the concession.
  • The exclusion is extended to a special purpose trust (i.e. for the use of a mentally or physically handicapped person).
  • The primary residence exclusion will be apportioned up for periods where it is not used as a primary residence or used by the taxpayer for purposes or trade.

Capital Losses

Are ring fenced and may not be deducted from your current years taxable income, but are carried over to the following tax year and is offset to future capital gains tax

What is the effect of CGT on the sale of a primary residence registered in the joint names of husband and wife?

If the residence is held by, say two individuals (for example, a husband and wife married in community of property) and both of them use it as a primary residence, the R1,5 million must be apportioned in relation to their interests, i.e. each spouse may claim an exclusion of up to R750 000 if the property is sold. They cannot each claim R1,5 million.

Note that the apportionment only applies if more than one natural person holds an interest in the residence. If, for example, a person holds a 60% interest in his primary residence, and a company holds the other 40%, then when the residence is sold, the individual can claim an exclusion of up to R1,5 million of the capital gain he makes. If the company sells its share it cannot get any exclusion because the R1,5 million exclusion only applies to natural persons and special trusts.

On the other hand, if a person holds a 60% interest in his primary residence, and his father holds the other 40%, then even though it is not the primary residence of his father, the person’s exclusion is limited to R900 000 if he makes a gain on the sale or disposal of the residence. The apportionment of the exclusion therefore only applies when more than one natural person or special trust jointly holds an interest in the residence at the same time.