Capital gains tax (CGT) is not a separate tax but forms part of income tax. CGT is basically a tax on the resale of assets. Anyone who disposes of or sells assets is liable for CGT. The tax also arises following the death of an asset owner. When submitting your annual income tax return, any gains or losses based on a transaction during the tax year must be declared and submitted.
How are capital gains distinguished from normal income?
It is up to the taxpayer to prove to South African Revenue Service (SARS) that certain sums were of capital nature, not revenue (ie. normal income). If an asset is intentionally purchased with the aim of generating a profit, it would be considered revenue. But if the intention was a financial investment, this would be capital.
SARS may question the objectives of an investor if there are frequent transactions purchasing an selling a specific asset type (eg. Fixed property). If a taxpayer keeps a property for long-term capital growth, SARS will see any profit on this as a capital gain.
Assets that are subject to capital gains tax
In principle, assets used for purposes of a trade are subject to CGT. Personal use assets such as private motor vehicle, furniture and jewellery are not subject to CGT. The one notable exception to this rule is an individual’s primary residence, which is subject to CGT.
Sale of primary residence
The first R2 million gain on the sale of a primary residence (the home that you mainly live in) is CGT-exempt. Homeowners who use part of the home for business will not be able to claim the R2 million exemption on that portion of the premises as that portion is business premises and not primary residence.
When did CGT come into effect?
CGT was instituted in South Africa on October 1, 2001, which is considered the “valuation date”, and only gains made on an asset from this date are liable for CGT. This means that, although any individual selling an asset is liable for CGT, the value on which CGT will be calculated will be based on the value of the asset at October 1, 2001 (if a meaningful independent valuation exists), and the gain made from this date, up to the date of sale. Where no meaningful independent valuation exists, SARS do accept one of two other specified methods of determining the value of the asset at October 1, 2001. Any profits accrued from this date onwards on the sale of specific capital assets will be taxed with CGT.
Who is liable to pay CGT?
Taxpayers, including individuals, trusts, companies and close corporations, will be taxed on the profit they make when they sell an asset or property. A resident, as defined in the Income Tax Act, is liable for CGT on assets located inside and outside South Africa. A non-resident is liable for CGT only on immovable property in South Africa or assets of a “permanent establishment” (branch) in South Africa. Certain indirect interests in immovable property, such as shares in a property company, are deemed to be immovable property.
When should it be paid?
CGT becomes payable when you receive your income tax assessment (IT34) or – in certain instances for provisional taxpayers – on submission of the second provisional tax return for the relevant tax year. As a registered taxpayer, you will declare your capital gains and losses on your tax return for the relevant year of assessment. Keep the records necessary to determine a capital gain or loss in a safe place, because many years may pass between the date on which you acquire an asset and the date on which you dispose of it.