At first glance, Capital Gains Tax (CGT) may seem like yet another thing to worry about when completing a tax return, but it needn’t cause confusion.
CGT is not a separate tax but forms part of income tax, which is taxed at a lower effective tax rate than ordinary income. CGT is basically a tax on the resale of assets. Anyone that disposes or sells their fixed assets, or following the death of the asset owner, is liable for CGT.
It came into effect in South Africa on 1 October 2001, this date is considered the “valuation date”, and only gains made on a property from this date are liable for CGT. This means that while any individual selling a property is liable for CGT, the value on which CGT will be calculated will be based on the value of the property as at 1 October 2001, and the gain made from this date, up to the date of sale. Any profits accrued from this date onwards on the sale of specific capital assets will be taxed with CGT.
Craig Hutchison CEO Engel & Völkers Southern Africa, explains that CGT is not as cut and dried as it seems and it is always best to chat to a professional in terms of what is owed to “The Receiver”, as this depends on a number of factors.
When submitting your annual income tax return, any gains or losses based on a transaction during that period must be declared and submitted. “This is where the confusion can occur and it is up to the taxpayer to prove that certain sums were capital, and not revenue. For instance if a property was intentionally purchased with the idea of generating a profit, it would be considered as revenue. But if the intention was as a financial investment, this would be capital,” explains Hutchison.
Investors need to ensure they keep proof of their objective of purchasing the asset to avoid the normal revenue tax. SARS is at liberty to question the objectives of the investor if there are frequent property transactions, and might very well consider this as a revenue tax. If the homeowner keeps the property for personal long-term capital growth, SARS will see any profit on this as a capital gain.
Expat case study
A South African citizen who has been working in Dubai on a 3-year contract, who has bought and then sold a property within a 6-month period, wanted to know if he is liable for CGT after selling his property.
- If the property remains unoccupied by the owner for a period longer than 5 years.
- During a period of absence, the owner lives within a 250km radius of the property.
- The homeowner used the primary residence tax benefit on another property.
- The homeowner did not live in the property for at least one year prior and one year after a period of absence.
It is important that you plan your relocation considering the capital gains tax implication, failing which, you will have to answer to the Receiver of Revenue.
These are important factors to note regarding Capital Gains Tax:
Who is liable to pay CGT?
Taxpayers, including individuals, trusts, companies and close corporations, will be taxed on the profit they make when they sell an asset or property. A resident, as defined in the Income Tax Act 58 of 1962, is liable for CGT on assets located both in and outside South Africa. A non-resident is liable for CGT only on immovable property in South Africa or assets of a “permanent establishment” (branch) in South Africa. Certain indirect interests in immovable property such as shares in a property company are deemed to be immovable property.
Some persons such as retirement funds are fully exempt from CGT. Public benefit organisations may be fully or partially exempt. Normal rental income from a property is revenue, which is declared on your annual income statement and therefore not subject to CGT.