- WHAT IS CAPITAL GAINS TAX?
- Capital Gains Tax (“CGT”) is the portion of normal income tax attributable to the inclusion in your taxable income of a taxable capital gain. Simply put, CGT is a tax levied on profit from the sale of property or another asset held as a capital asset or an investment.
- The purpose of CGT is to allow for vertical equity in that tax payers with greater ability to pay taxes bear a greater burden of taxation, thus contributing to the progressivity of the income tax system while enabling the government to pursue other tax policy objectives, premised on widening tax bases and reducing standard tax rates. The introduction of CGT has enabled the tax base to be broadened, thus facilitating lower overall tax rates.
- WHERE DOES CGT APPLY?
- CGT applies to all assets of a person that are disposed of, subject to certain specific limitations set out in the 8th Schedule of the Income Tax Act, 1962 (“the Act”). A disposal covers any event, act, forbearance, or operation of law which results in the creation, variation, transfer, or extinction of an asset. It also includes events treated as disposals under the Act, such as commencement of residence or change in usage, cessation of residence, and death of taxpayer.
- Once an asset is disposed of, it gives rise to proceeds, which refers to the amount accrued or received by the seller of an asset on its disposal.
- The capital gain is the difference between the base cost and the proceeds from the disposal of the asset. The base cost is, generally speaking, the purchase price plus any capital expenditure incurred in respect of the asset. It should however be noted that there are different methods of calculating the base cost, depending on when and how the asset was obtained.
- HOW IS CGT CALCULATED?
- In order to calculate CGT, you first need to calculate the capital gain on the asset disposed of. You do this by calculating the amount by which the proceeds exceed the base cost of the asset, for example:
Jack buys a house for R250 000.00 and sells it a few years later for R480 000.00
Therefore: Base cost = R 250 000.00
Proceeds = R 480 000.00
Capital gain = (proceeds – base cost)
R 480 000.00 – R250 000.00
R 230 000.00
- An individual is given an annual exclusion of R40 000.00 in respect of any capital gains made during the tax year. The taxable capital gain portion which is then to be included in taxable income is, at present (the year 2020), 40% of the net capital gain.
As a natural person, Jack is entitled to the annual exclusion of R40 000.00
The capital gain for the sale of the house is R230 000.00
Therefore: Capital gain = R230 000.00
Annual exclusion = R40 000.00
Net capital gain = capital gain – annual exclusion
R230 000.00 – R40 000.00
Taxable capital gain = 40% x net capital gain
40% x R190 000.00
The taxable capital gain of R76 000.00 must therefore be included in Jack’s taxable income and will be taxed at his marginal income tax rate. Therefore, if Jack earns income of more than R1 500 000.00, he will be taxed at 45%:
Income tax payable = Taxable capital gain x marginal tax rate
R 76 000 x 45%
There are certain assets which are excluded from CGT and the disposal of these assets will not trigger CGT, such as the following:
- Personal use assets, such as personal belongings including cars, caravans, art, stamp collections, furniture, household appliances and any other assets used mainly for personal, non-trade purposes, excluding immovable property and financial instruments such as shares, participatory interest in collective investment schemes as well as cryptocurrency;
- Boats not longer than 10 metres and airplanes with an empty mass of 450 kilograms or less, which are personal use assets;
- Lump sum payments from pension, pension preservation, provident preservation and retirement annuity funds;
- Proceeds from an endowment policy or life insurance policy, not including foreign or second hand policies;
- Compensation for personal injury or illness;
- Prizes or winnings from gambling, games or compensations which are authorised by, and conducted under, South African law;
- Donation or bequest of an asset to an approved public benefit organisation;
- Disposal of an interest of at least 10% in a foreign company;
- Receipt of certain land restitution claims;
- A small business assets exclusion(limited to R1.8 million during a person’s lifetime); and
- A primary residence exclusion (limited to R2 million per primary residence).
Should you further be uncertain about your estate planning, please feel free to contact our office to consult with one of our experienced fiduciary specialists.
LLB; LLM (Estate Planning)
Fiduciary and Commercial Department
Phone: 012 361 9823