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What to know about Capital Gains Tax

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06 Sep 2013

While Capital Gains Tax (CGT) won’t pertain to every property transaction, it is vital that those looking to sell their property understand the implications that it may have on their property sale transactions, says Adrian Goslett, chief executive officer of RE/MAX of Southern Africa.

For a seller to determine the capital gain made in a transaction they will need to deduct the amount that property sold for from the base cost of the property.

Goslett explains that CGT forms part of a continuing reform programme that was introduced in South Africa in October 2001.

Essentially it is the tax that is payable by a seller on any profit made from the sale of a fixed property or any capital sale of assets globally.

While CGT applies to all individual South Africa resident taxpayers as well as companies, close corporations and trusts, foreign investors are not exempt.

Any non-South African resident taxpayer who sells an immovable property in South Africa will be liable to pay the applicable CGT on that transaction, says Goslett.

He notes while CGT was only introduced in South Africa in 2001, internationally CGT was implemented a few decades ago in many of the countries that South Africa trades with.

Although many capital gains or losses on the disposal of an asset are subject to CGT, there are some cases where transactions are excluded due to specific provisions.

These provisions can be found in the Eighth Schedule to the Income Tax Act, 1962 (the Act), which determines a taxable capital gain or assessed capital loss.

With regards to the sale of a primary residence, Goslett says that the large majority of sales transactions will not be subject to CGT because the first R2 million of any capital gain or loss on the sale is disregarded for CGT purposes.

He points out that in terms of the Act, a primary residence is defined as a property which is owned by a natural person.

The owner or their spouse must ordinarily reside in the property as their main residence and it must predominantly be used for domestic purposes.

In cases where the property has been used for business purposes, the exemption will be apportioned for those periods where the property is not used as a primary residence.

According to Goslett, there are some cases where the owner of the property will be treated as having been ordinarily resident for a continuous period of up to two years even if they have not been living in the primary residence during that two-year period, provided the following circumstances apply:

• The primary residence has been accidentally rendered uninhabitable.

• The primary residence was in the process of being sold while a new primary residence was acquired or was in the process of being acquired.

• The property was being built on land acquired for the purpose of erecting your primary residence.      

“Before 1 March 2012, the primary residence exclusion was R1.5 million, however since the budget speech in March 2012 the exemption on a primary residence has been changed to R2 million.”

He says it is important to remember that this is based on the capital gain made on the sale and not the purchase price of the property, so there are a number of expenses that will need to be deducted to determine whether CGT is applicable.

With regards to the sale of a primary residence, Goslett says that the large majority of sales transactions will not be subject to CGT because the first R2 million of any capital gain or loss on the sale is disregarded for CGT purposes.

For a seller to determine the capital gain made in a transaction they will need to deduct the amount that property sold for from the base cost of the property.

The base cost is determined by combining the original price the seller paid for the home along with all costs incurred during the buying and selling of the property.

These costs would include expenditure to acquire the property, transfer costs and duties, attorney fees, agent’s commission and other services rendered, according to Goslett.

While these costs can also include any renovations which qualify as improvements to the property, routine maintenance costs may not be included.

Once this base cost of the property has been determined, it is then possible for the South African Revenue Services to calculate the CGT to be paid based on the net profit realised.

Goslett says that Section 26A of the Act provides that a taxable capital gain must be included in the seller’s taxable income and will be taxed according to their tax bracket.

The CGT is payable when the individual’s income tax return is submitted at the end of the financial year during which the property was sold.

According to Goslett, in the instance where a primary residence is registered jointly in the names of the owner and their spouse, each would benefit from the residential exclusion according to the interest they hold in that residence.

So if each spouse holds an equal share in the property, each would qualify for a primary residence exclusion of R1 million.

Although this is provided that both parties reside in the property together and do not own separate primary residences. No exemption will apply on capital gain realised from the sale of an individual’s second home or holiday home.

“Due to the often complicated nature of property tax, it is always advisable to seek the advice of a professional tax consultant if there are any areas regarding CGT that sellers are unsure of,” advises Goslett.

An expert tax consultant or conveyancing attorney can offer invaluable guidance through the submission process, he adds.

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