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Capital Gains Tax
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What is Capital Gains Tax?
Capital Gains Tax (CGT) exists in most first developed countries such as the United States of America, Canada, the United Kingdom and Australia. On 1 October 2001, CGT was introduced in South Africa, bringing our country in line with international practice. CGT is basically a tax (government charge) you pay on the profits made from the resale of assets.
You are only liable for payment when you sell, or otherwise dispose, of your asset. All taxpayers, including individuals, trusts, companies and close corporations are taxed on the profit made from selling assets (or property of a capital nature, i.e. equipment with which goods and services are produced, like tools, machinery, buildings and so on).
CGT helps to widen the tax net, which should help reduce personal income tax
When is Capital Gains Tax Triggered?
CGT is triggered on the disposal or deemed disposal of an asset.
Disposal can occur when an asset is:
- Sold (we will refer to disposal as "sold/sell" in the rest of this document);
- Given away;
- Scrapped;
- Lost;
- Destroyed;
- Redeemed or Cancelled.
Who Has to Pay Capital Gains Tax?
Trusts, Companies and Close Corporations
All assets including properties registered in the names of trusts, companies and close corporations are subject to CGT being paid on the sale of the property.
Individuals (Natural Persons)
All South African and non South African residents who make a profit in South Africa need to pay CGT.
You will not be affected by CGT when:
- You sell your primary residence (registered in your personal name), unless the property is larger than two hectares and/or the profit from the sale of it is higher than R1 millionYou sell your private motor vehicle (If it is not used for business).
- You sell your personal belongings, i.e. furniture, jewellery, clothing, art and so on.
- You receive proceeds from pension, provident, retirement annuity funds and life insurance policies.
- You win money from lotteries, casinos and prizes (if you are not a professional gambler).
- You receive compensation for injury, illness and defamation.
- You make a profit of R500 000.00 or less from the sale of a small business, pending retirement if:
- you are 55 years or older; or
- the sale of your small business is a consequence of ill health, physical disability/weakness, or death. - You make a profit from foreign currency being changed into Rand after an international trip.
You will however be affected by CGT when you sell:
Your primary residence (registered in your personal name, a company, cc or trust) and the profit or loss on the sale is more than R1 million. The amount over R1 million is subject to CGT.
- Your primary residence and a portion of it was used for gain, i.e. the portion pertaining to the cottage that you let to a tenant or used for business purposes. That part of the property is subject to CGT.
- Your second, third and so on property (registered in your personal name, a company, cc or trust) for a profit or loss. (A holiday home or property you let to a tenant and so on.)
- A property that is larger than two hectares - the area over two hectares is subject to CGT.
- Your shares, private investments, second-hand policies and unit trusts.
- Your gold, platinum or silver minted coins, i.e. Krugerrands.
- Your business.
How is Capital Gain or Loss Determined?
Capital gain or loss is determined by deducting the base cost of the asset from the amount you sell it for (the difference between the base cost and the sale amount). If the asset was bought before 1 October 2001, you must also deduct the profit that accumulated until then.
This is why it is important to know what the value was of your assets on 1 October 2001. Hence the fact that the government has given you two years within which to have your assets valued. Only gains made after 1 October 2002 will be taxed.
The base cost comprises:
- the expenditure incurred to own the asset, including the purchase price, transfer costs, stampduty, conveyancer and legal fees, and so on;
- the cost of the installation of the asset, including foundations and supporting structures on a building;
- the expenditure incurred to make any improvements on the asset;
- any other costs incurred from selling the asset, i.e. Estate Agent's commission, advertising costs to find a buyer;
- the cost incurred for the valuation of the asset for purposes of determining a capital gain or loss.
- The base cost does not include:
- any expenditure that may be claimed as an income tax deduction;
- any costs incurred on interest on loans to finance the asset;
- any costs incurred on the upkeep and repairs made to the asset, including insurance premiums;
- devaluation on the asset, i.e. wear and tear;
- the effects of inflation.
How Much Capital Gains Tax Do You Need to Pay?
South Africans may generally feel that the increase in the value of an asset can often be attributed to inflation, rather than to an actual increase in the value in the value of the asset.
This concern has been addressed. Only a portion of the capital gain is taxable. This portion is currently only:
- 25% of the net profit for natural persons; and
- 50% of the net profit for other legal entities (trusts, companies and close corporations).
This taxable portion of your net profit (the 25% or 50%) will be taxed at your Income Tax Rate. Once worked out, you will pay approximately 10 % for natural persons, 20% for trusts and 15% for other legal entities of your taxable portion.
Example of how to work out Capital Gains Tax:
As a natural person, your maximum income tax rate is 40%. You must therefore have your average capital gain for the minus the Annual Exclusion that an individual is entitles to make each year to determine your liability.
For example:
- 25% of R 50 000.00 is R 12 500.00, which is taxed at 40%.
- 40% of R12 500.00 is R 5 000.00 (this is the amount of CGT payable by you).
- The R 5 000.00 is 10% of the original R 50 000.00 profit made.
What is an Annual Exclusion?
An annual exclusion is the gain of up to R10 000.00 an individual is entitled to make each year, tax-free. This also applies to losses. If you make a loss of less than R10 000.00 for the year, it will be excluded for CGT purposes.
Your annual exclusion increases to R50 000.00 in the year you die, meaning that your estate can dispose of your assets without incurring tax, unless the gain or loss is more than R50 000.00.
Can You Avoid Capital Gains Tax?
No. In terms of Section 76 of the Income Tax Act you will pay a penalty to the South African Revenue Services if it is found that you incorrectly valued an asset. The South African Revenue Services have high-tech software called the New Income Tax System (NITS), which communicates with systems in the Deeds Registry, Motor Vehicle Registry, Johannesburg Securities Exchange (JSE) and all the financial institutions (banks).
Please contact the South African Revenue Services (SARS) for more information regarding the amount of CGT you may be liable for when selling a property. SARS can be reached at:
Call Centre : 0860 12 12 15
Tel : 011 374-8000
Email :
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Web Site : www.sars.gov.za
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