On the 1st October
2001 Capital Gains Tax (CGT) was introduced to South Africa. What is it and how
might it affect any property you own? It is a surcharge on the profit you make
on the resale of any substantial asset with some exceptions. It covers
immovable property, movables such as boats, caravans and motor cars, company
share sales and the like. In this article, we will look solely at immovable
property and the application of CGT to property sales.
Which Properties Are Affected?
As a general rule, all
properties you sell, other than your primary residence, attract CGT on the nett
profit you make. The distinctions are these (as at 23 March 2023):
1.
Primary Residence
This
is your normal home where you live and which you personally regard as your
permanent place of residence. It does not matter who else lives on the
premises. The important question is, simply: who is the registered owner of the
property, and does he live on it? The same applies to joint ownership.
If one of two owners live on the property and the other does not, only the
share of the resident owner becomes exempt from CGT on resale of the property.
Your
primary residence is presently exempt from CGT but only up to the first R2
million of your profit. This figure is likely to be increased some time in the future,
but it is the exemption limit at the time of writing. Over and above this threshold,
you will have to pay CGT on the excess amount.
2.
Second and Further Properties
Your
townhouse which you bought as an investment, your holiday home at the coast,
your property which you inherited from your parents and are now renting out,
are all properties other than your primary residence and attract CGT on resale.
Only one property, your normal residence, is exempt from CGT and that can only
be the property you are actually living in at the time of sale.
3.
Close Corporations, Companies and Trusts
If
your primary residence is registered in the name of a Family Trust or a Close
Corporation or Company, you will not be entitled to the primary
residence exemption. It applies only to a property registered in your personal
name.
At What Rate is Capital Gains
Tax Levied?
This depends on the marginal
tax rates applicable to individuals, juristic persons, and trusts. The rates
levied on each of these in turn is presently calculated as follows:
1.
Private Individuals
A
maximum of 18.0% is chargeable. The actual rate is worked out on your
personal income tax rate. If you are earning very little and do not reach the
45% ceiling, your CGT rate will be proportionally less. If you are unemployed
or have no other source of taxable income, no CGT will be payable.
2.
Companies and Close Corporations
A flat
rate of 21.6% will accordingly be levied on the profit gained from the
sale of any property owned by a Company or CC.
3.
Family Trusts
A flat
rate of 36.0% is chargeable on the nett profit of all immovable property
sales by Trusts whether they are trading trusts or not. Prospective buyers who
are thinking of registering their properties in a Trust should be made aware of
this before they do.
4.
From What Date is Capital Gains Tax Applicable?
Capital
Gains Tax was introduced on the 1st of October 2001. It only applies
to profits accruing from that date. If you bought a property in 1991, the first
ten years you owned it are not included in the CGT calculation. Only the time
period from 1st October 2001 to the date of resale attracts CGT. If,
say, you sell the property in October 2009, then only the profit made during
the eight year period from 2001 to 2009 will be taxable.
SARS has allowed property
owners to acquire valuations of their properties showing the market value at
inception date, namely 1-10-2001. This facility expired on the 30th of
September 2004. If you acquired such a valuation at the time and submit it to
SARS it will calculate the nett profit by deducting the valuation amount from
your resale price. In all other cases SARS applies what is known as the time-apportionment
method. The difference between your original purchase price when you
acquired the property and your resale price will be determined as your gross
profit. The percentage of time you've owned it since October 2001 will once
again be the only portion taxable but your CGT will be levied at this same
percentage of your gross profit.
If you acquired a valuation,
it is only advisable to submit it if your property accrued in value far more
substantially before 2001 than it has done since. This may have been due to
market forces but could also have been determined by expensive
improvements you made to it.
5.
What Deductions Are Allowed?
The
key term here is your base cost. This means your gross taxable profit on
resale less any allowable deductions you may claim. These are:
1.1. Improvements
to the Property
The costs of any additions you have done, may
be deducted. This includes a new swimming pool, extra rooms, a new tiled
driveway, etc. Keep your invoices and statements for all such expenses
incurred. Please note you may only recover expenses on improvements to the
property, not routine repairs or paint jobs that qualify as normal maintenance
expenses on the property. Working out the difference between improvements and
maintenance is very easy: maintenance means work done to bring the property
back to its original condition, improvements are value-adding additions. You
may have to persuade your local SARS office, in some cases, that the expenses
you have claimed are actually for improvements and not routine maintenance.
1.2.
Acquisition Costs
You may recover all your transfer costs,
including conveyancing fees and transfer duty, which you disbursed when you
bought the property. Keep your statements which your conveyancers give you as
well as proof of payment. You may not claim any bond costs.
1.3. Resale
Expenses
Any capital expense you incur in the resale of
the property is deductible. Here the main item (and usually the only one) will
be agent's commission. Whatever commission you pay an estate agent may be
deducted from your base costs.
1.4. Special
Levies
If you own a sectional title unit, any special levies you
have paid to your body corporate for improvements to the common property, are
also legitimate deductions as you own an undivided share in the common property
of your complex. Once again, keep your invoices and proof of payment.
The
nett difference becomes your taxable amount and CGT will be levied on it. It is
important to keep all statements of account which reflect expenses
that are deductible.
6. When
is Capital Gains Tax Payable to SARS?
It is
treated like normal income tax and must be paid when you receive your
assessment for the year just past. All IT 12 forms now have a Capital Gains Tax
section where you have to disclose any major assets sold during the previous
year. SARS will calculate the tax payable and advise you of the amount owing
when sending your assessment.
7. Does
Capital Gains Tax Affect Deceased Estates?
Yes,
it does. When a property owner dies, all his properties (and other taxable
assets) attract CGT. Once again, the primary residence is currently exempted up
to R2 million of a sale's nett profit. With all the others, the value of each
property as at date of death, will have to be determined and CGT will be
payable on the taxable amount.
Thereafter
the heir inheriting the property will be liable for CGT from the date of
acquisition to the date of resale. If a property is sold out of the estate, CGT
will be calculated on the resale price.
8. Can
Primary Residences Be Transferred to Individuals?
To
avoid CGT on your primary residence where it is still registered in the name of
the Trust, Company or CC, you may purchase it in your own name and transfer it
to yourself. This is a legitimate form of CGT tax avoidance and your CC will
only be liable for CGT on the accruing value of the property from the 1st
October 2001 to the date it is sold to you.
Unfortunately,
you will still have to pay transfer costs and transfer duty. SARS allowed an eighteen-month
window period initially for primary residences which were Company, Trust
or CC-owned to be transferred to individuals free of transfer duty but this
moratorium expired on the 31st March 2003.
Such
transfers can still be done but are expensive and you will have to weigh the
transfer costs against the likely CGT savings to decide whether it will be
worth it.
In
principle, the question is simply how long you intend to stay in the property.
If you're likely to reside in it for at least another five years, you'll
probably be well-advised to take it out of your CC (Company or Trust) and
transfer it into your own name.
Further
information on CGT can be obtained from SARS' website: www.sars.gov.za/cgt
CREDIT:
Property Law Publications
John Gilchrist
082 904 1300
