THE INS AND OUTS OF CAPITAL GAINS TAX
While most property transactions will not be subject to Capital Gains Tax (CGT), it is still important to understand the implications that it could have, especially if your home sells for more than the primary residence exclusion threshold.
Forming part of an individual’s income tax, CGT is part of an ongoing reform programme which was introduced in South Africa in October 2001. The tax pertains to the disposal of an asset such as an immovable property or any capital sale of assets globally, where the proceeds exceed its base cost. The tax applies to South African resident taxpayers, trusts and companies. Non-residents are liable to pay CGT only on the sale of their immovable property in South Africa. Additionally, a withholding tax applies to non-resident sellers of immovable property regarding section 35A of the Act. The amount withheld by the buyer serves as an advance payment towards the seller’s final income tax liability.
Although relatively new to this country, CGT was implemented in many of the countries that South Africa trades with a few decades ago. While there are numerous capital gains or losses on the disposal of an asset that are subject to taxation, there are instances where transactions are exempt due to certain concessions. The conditions about these exclusions are found in the Eighth Schedule to the Income Tax Act, 1962 (the Act), which determines a taxable capital gain or assessed capital loss.
When a primary residence is sold, there is exclusion on the first R2 million of any capital gain or loss. If sold for a capital gain of R2.5 million, only R500 000 would be subject to taxation.
A primary residence is defined as any structure, boat, caravan or mobile home, which is used as a place of residence by a natural person. Either a natural person or a special trust must own an interest in the residence. The owner, their spouse or a beneficiary of the special trust, must ordinarily reside in the property as their main residence and it must be predominantly used for domestic purposes. If used for business purposes, the exemption will be apportioned for those periods where the property is not used as a primary residence.
Where a primary residence is jointly registered in the names of two people such as a husband and wife, each would benefit from the residential exclusion according to their interest that residence. If each spouse holds a 50% share in the property, each will qualify for a primary residence exclusion of R1 million - provided they both reside in the home together and do not own separate primary residences. No exemption will apply on capital gain realised from the sale of an individual’s second home or holiday home.
There certain instances where the owner of the property will be treated as having been ordinarily resident for a continuous period of up to two years, even if they have not been living in the primary residence that period, provided the following circumstances apply:
- The primary residence has been accidentally rendered uninhabitable.
- The primary residence was in the process of being sold while a new primary residence was acquired or was in the process of being acquired.
- The property was being built on land acquired for the purpose of erecting a primary residence.
It is important to remember that CGT applies to the capital gain or loss during a property sale and not on the purchase price of the property. To determine whether the taxation is relevant, there are some expenses that need to be deducted.
Firstly the selling price of the home needs to be deducted from the base cost of the property. The base cost is a combination of the original price of the home and all costs incurred acquiring and selling the property. These costs include transfer cost, transfer duty, agent’s commission, advertising costs, VAT and any professional fees. If there are receipts and invoices, you can also include the costs of improvements, alterations and renovations. However, routine maintenance, insurance and rates and taxes may not be included. It is essential to keep accurate records of the money spent on the property because If you are unable to prove any costs through your records, you will not be able to deduct them from the proceeds to determine the capital gain.
Once the base cost is determined, it is then possible for SARS to calculate the CGT to be paid based on the net profit realised. The CGT inclusion rate for individuals is 40% as from March 2016. The CGT is payable when your income tax return is submitted at the end of the financial year during which the property was sold. All records should be kept for at least four years after the date that the income tax return reflecting the capital gain or loss is submitted.
Property tax can be highly complicated, so it is always advisable to seek the advice of a professional tax consultant who can point you in the right direction regarding CGT. An expert tax consultant or conveyancing attorney can offer invaluable guidance through the submission process.