Capital Gains Tax became payable on capital gains made after 1 October 2001. The tax applies to the property of all South African citizens and permanent residents wheresoever such property may exist [i.e. here or abroad] and furthermore to property owned by foreigners [i.e. non citizens / residents] which property is situate within the RSA.
The law which created the Capital Gains Tax provided for certain exclusions from the tax [i.e. allowed for capital gains which would otherwise be taxed to be tax free], the most important of which, for purposes of this commentary relates to property which constitute the taxpayers primary residence. As long as the taxpayer is a human being [not a corporate entity such as a close corporation, company or trust] the first R2 million capital gain [profit] made by that taxpayer on the sale of the primary residence property is exempt from the tax.
Everyone is also now entitled to an additional exclusion of R30 000-00 each year. This is however not able to be carried over and accumulated from year to year.
The gain made by a taxpayer is determined by the difference between the “base cost” of the property and the selling price. “Base cost” is however more than just the original purchase price of the property. One is also allowed to include in base cost the original costs of taking transfer of the property, the costs of selling the property [i.e. agent’s commission] and the costs incurred in improving the property over the years. The taxpayer is not however permitted to include any interest paid on a mortgage bond, repairs and maintenance to the property, insurance premiums or rates and taxes.
The Capital Gains Tax is triggered, in most instances, by the sale of the property.
As the Capital Gains Tax is not intended to affect gains made before the 1st October 2001, all taxpayers were offered an opportunity to have all properties owned by them as of that date valued for purposes of calculating future capital gains, based on that valuation as the deemed purchase price of the property. It would have been in the owner’s interest to obtain as high a valuation as possible to minimize the increase in value after 1 October 2001. The period for such valuations closed on 30 September 2004.
If no such written valuation exists then the taxpayer will in all probability be obliged to utilize the time apportionment method. In this method the increase in value of the property is apportioned pro rata between the period ending on 30 September 2001 and the period commencing 1 October 2001. Only the gains made during the period after 1 October 2001 are taxable.
There is another method of calculating the taxable gain when no records at all exist to show the base cost, but this will hardly ever be applicable to the calculation of capital gains in sales of property.
The calculation of CGT differs depending on the entity which makes the gain.
For individual human beings 40% of the gain is added to the individual’s taxable income for the tax year in question. The gain is then taxed at the individual’s tax rate. If this is at the highest rate (currently 41%) the tax is an effective 16.4% of the gain.
For companies (and CC’s) 80% of the gain is added to the companies taxable income for the tax year in question. The gain is then taxed at the company tax rate of 28%. This works out to an effective rate of 22.4% of the gain.
For trusts 80% of the gain is added to the trust’s taxable income for the tax year in question. The gain is then taxed at the individual tax rate as trusts are taxed at the same rate as individuals. This works out to an effective rate of 32.8% of the gain (if the trust is taxed at the highest tax bracket). Trusts do however have the flexibility in most instances to distribute this gain to the beneficiaries of the trust, thereby allowing the gain to be taxed in the hands of the beneficiaries at ordinary individual tax rates.
Section 35A Withholding of Capital Gains Tax:
For South African residents the Capital Gains Tax is payable at the end of the tax year in which the gain occurred. Insofar as non-residents are concerned and as from the 1st September 2007 the South African Revenue Service changed the law to cope with the fact that non-residents were getting away with selling properties in South Africa without paying the Capital Gains Tax which might have been payable.
The effect of the amendments is the following:
Whenever the seller is a non-resident (the definition of “resident” is fairly complex) and the purchase price is more than two million rand both the estate agent and the conveyancer involved with the transaction are obliged in law to inform the buyer in writing of the fact that the seller is a non-resident.
Once the buyer is informed the buyer is obliged to withhold a certain percentage of the purchase price at the time of transfer and to pay it to SARS within 14 days from date of transfer for the account of the seller. The percentage applicable is 5% if the seller is a natural person, 7.5% if the seller is a company or close corporation and 10% if the seller is a trust.
Failure on the part of the estate agent and/or the conveyancer to enforce the payment of tax in this way could result in the forfeit to SARS of the commission/fee earned from the transaction.
It is envisaged that after transfer the seller will then approach SARS with a proper calculation of the actual Capital Gains Tax payable (if any) by the seller and receive a refund of the excess received by SARS. In practice we advise the seller to approach SARS for a special ruling and tax directive on the amount of tax payable before transfer so that we are not obliged to pay any more to SARS on transfer than what is due.
If not already registered, non-resident sellers must be register as taxpayers with SARS to enable the process to be dealt with. They must go and register with SARS and obtain an income tax reference number as soon as they decide to sell their property. This does not mean that they will have to pay tax on their foreign income. It simply provides a reference number for purposes of enabling SARS to process the withheld amount.
Readers are warned that the tax laws in South Africa change annually and the accuracy of this article and the rates quoted should be questioned if read after February 2017.
Miltons Matsemela Incorporated
5 May 2016