Capital gains tax issues clarified

The introduction of Capital Gains Tax (CGT) on property has focused attention on two difficult issues; whether to claim from the taxman for the use of a home office and what to do about the profits realised from the sub-division of land.

Gerhard Kotzé, CEO of the ERA South Africa property group says that homeowners who are thinking about working from home or perhaps sub-dividing their residential stands need first to ensure that they are fully aware of the tax implications.

"In terms of the Small Office Home Office (SOHO) scenario, it's common for homeowners to claim against their taxable income for a proportion of the property they devote to business purposes.

"However, there has always been something of a day of reckoning as it were when it comes to the sale of a property, in that the Receiver may claim back from the owner the deductions made in previous tax years."

"While nothing in terms of tax law has changed in this respect, the added consideration of CGT, when lumped together with the reclaimed rebates for the use of home space for office purposes, could come as a shock for the homeowner."

It will not necessarily be a "train smash", Kotzé says. Because the first R1m worth of capital gain, that is basically the difference between the purchase price of your home and its selling price, is exempt from CGT, your primary residence is more attractive as an investment than the likes of shares and many other investments when it comes to CGT.

In fact there's an argument for fresh investment in your primary residence, such as the addition of a home office, rather than in assets that are fully subject to CGT.

"However, if part of your property has been used for business purposes and you have been receiving a tax benefit from the Receiver as a result of that usage, you do need to reckon on a portion of the capital gain on re-sale being taxed."

In the case of sub-division, property owners need to take care to be seen by the Receiver as having simply realized a capital asset by sub-dividing. "If you are seen to have taken pre-meditated steps to develop the property, you could be deemed to have traded in the land for profit," says Kotzé.

"The danger then is that you may find that all your future property transactions are treated the same way and will attract higher tax.

Consequently, it is advisable for property owners to seek professional tax advice before starting any sub-division procedures."

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