Capital gains tax (or CGT) arises on the disposal of an asset. As the definition of ‘asset’ includes rights or interests of whatever nature in fixed property, it is clear that CGT will arise not only on the outright sale of a property but also when limited interests in property, such as usufructs and bare dominiums are sold.
In the case of an interest in fixed property situated in South Africa, residents and non-residents are liable to CGT. Non-residents are also liable to CGT on the disposal of rights in property-owning companies, close corporations and trusts, in certain circumstances. The definition of ‘disposal’ includes not only sales but also various deemed disposals, the most important of which is the death of a natural person. When a taxpayer dies, he or she is deemed to have disposed of all assets at market value, thus triggering a potential capital gain. Exclusions include property left to a surviving spouse or to a qualifying Public Benefit Organisation. Where property is donated, capital gains tax arises, using the full market value as ‘proceeds’, unless the donation is to the taxpayer’s spouse or a qualifying Public Benefit Organisation.
CGT is in reality not a separate tax, but forms part of normal income tax. The taxpayer’s capital gain is determined by deducting the base cost of the asset from its proceeds. ‘Proceeds’ is the gross selling price of the property. ‘Base cost’ is the cost of the property or, alternatively, the value of the property at 1 October 2001 (where the asset was owned by the taxpayer as at this date – see below), plus various other costs, the most common of which are: the cost of improvements, transfer duty on purchase, valuation costs, conveyancer’s fees and advertising costs (to find a buyer). Contrary to popular belief, the cost of bond interest cannot be claimed where the property is sold, unless the property was used exclusively for business purposes and the interest was not claimed as a normal tax deduction.
Once the capital gain has been determined, the taxpayer deducts the primary residence exclusion (only where the taxpayer is a natural person and where the property was the taxpayer’s primary residence) of R 1.5 million (2009 amount) and the annual exclusion of R 16 000 (only where the taxpayer is a natural person – 2009 amount).
The result is multiplied by the taxpayer’s inclusion rate and included with the taxpayer’s other taxable income for the year. This gives rise to the following maximum effective rates of CGT:
Inclusion rate Maximum Effective rate
Individuals 25 % 10 %
Companies (incl CCs) 50 % 14 %
Trusts 50 % 20 %
Where the asset was owned by the taxpayer at 1 October 2001 (known as the ‘valuation date’), the value of the property at the valuation date can be determined in one of three ways: using an actual valuation as at this date, using the time-apportionment base cost formula or using 20 % of the proceeds as the value at valuation date. The taxpayer is free to choose whichever method gives the best result (where there is a capital gain).
A simple example of an application of the time apportionment formula is as follows:
EXAMPLE
Say a property cost R 500 000 in September 1996 and was sold for R 2 million in June 2007. Selling costs amounted to R 100 000.
One takes the R 500 000 plus [(R 2 million less R 100 000) less R 500 000] * 6 / 12 = R 1.2 million. This is the valuation date value according to the time apportionment method. The ‘base cost’ of the property is then R 1.2 million plus the selling costs of R 100 000 equals R 1.3 million. It should be noted that in applying this formula, part of a year (before or after 1 October 2001) is treated as a full year.
If the seller is a non-resident, a withholdings tax is applied to the proceeds, at rates of either 5, 7.5 or 10 % of the proceeds, depending on whether the seller is a natural person, company (or CC) or trust, respectively.
