Capital Gains Tax – how to figure it out
According to South African legislation, any gains made from a property sold on or after 1 October 2001, will be subject to Capital Gains Tax. It is important to take Capital Gains Tax (CGT) into consideration when deciding to sell a property.
Properties that appreciated in value over the past few years should be considered when deciding to put a price tag on it. For example, a house purchased for R2m that generated a R5m capital gain over a 6 year period is now worth R7m. The first R1.5m gain on a primary residence is exempt from Capital Gains Tax. The net taxable gain on the property is thus R3.5m, of which 25% will be taxable – in this case – R875 000. The tax levied will be at the seller’s marginal tax rate, say for instance 40%, which means that 40% of R875 000 is R350 000, which is the CGT payable.
Secondary properties are not offered “primary residence exemption” and therefore the first R1.5m of the net gain forms part of the capital gain. This rule applies to South Africans who have properties overseas and non-residents who have property in South Africa.
To work out the amount taxable, it is important to determine the base cost of the property. The base cost includes the buying price, transfer duty, agent’s commission, advertising costs, broker’s fees and any other cost incurred during improvements on the property. The base cost does not form part of the profits and will therefore not be deemed as a capital gain.
Capital Gains Tax is only triggered where a profit has been realised, the seller will not have to pay tax if any losses were incurred from the time of purchase. It is also important to note that CGT is payable only on the profits generated by assets after 1 October 2001.
Sellers can choose from these options and work out the best base cost for them:
- Deemed value of property on 1 October 2001. Any improvements or alterations costs can be added to this value to determine the base cost.
- Time Apportionment method. The base cost is determined by looking at the number of years the property was under the seller’s ownership and uses the period beyond October 2001 to work out a percentage for CGT on the profit made.
- The 20% rule. The 20% rule deems 20% of profits received by the seller as base cost, therefore it is important to ensure that allowable costs incurred after 1 October 2001 are deducted before applying this rule.
As a taxpayer, the seller should consider the option that would be most beneficial for his/her individual circumstances.
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