Whether you plan to flip houses like a McDonald’s employee flips burgers or you want to live and, eventually, die in your own tiny piece of South Africa you need to know about Capital Gains Tax (CGT). Why? When you dispose of an asset, like property, any profits made might be subject to this form taxation.
What is CGT?
CGT is a comprehensive tool that covers what SARS calls the “disposal” of certain types of asset.
At its most basic this means that when you buy a property low and sell it high the difference in price less the costs to make the purchase is considered a capital gain. A portion of this amount, determined by SARS, may be subject to CGT.
Conversely were you to sell low after having bought high the difference, including costs, is considered a capital loss. And a portion of that loss can be used to offset any other taxable profits made. This loss can be carried forward into the next tax year.
Capital Gains Tax does not require registration and can be triggered by the “disposal” of an asset. Disposals that trigger CGT include:
• Donation (unless to a registered and recognized charitable organization)
Certain assets are excluded from consideration:
• Primary residence (the property you own and live in)
• Private motor vehicles
• Personal belongings (appliances etc.)
• Compensation for personal injury or illness
• Prizes (lottery, gambling or competitions)
• Lump sum pension pay-outs
Why does CGT exist!?
CGT was introduced to South Africa in 2001 to close a loophole that was allowing businesses and individuals to avoid taxes through the acquisition and disposal of assets. According to SARS this was reducing the “efficiency and equity of the overall tax system”.
Basically some businesses and individuals were foregoing taxable salaries or income to receive assets (like shares). They would then sell those shares (or properties or Krugerrands) for a profit and this was taxed at a lower rate than simply earning the salary. On the flipside, some companies and people were donating or even scrapping viable assets to increase capital losses to offset profits in other areas.
CGT policy allows for tax free donations to registered charities which also means that you can’t simply donate all your assets to family members in an effort to avoid taxation.
CGT and my property plans
Even without the aim of building a property portfolio you are, as a person capable of owning a house or flat, likely to buy and sell a property more than two times in your life. Despite this many South African property owners might never have to pay any CGT at all thanks to threshold and exclusion amounts. But if they do, it can be quite a nasty shock particularly when they’re looking to purchase a more expensive property and need every cent they can get. If you start your property ownership with CGT in mind, you could avoid some heartache as well as save yourself many thousands of Rand in tax when you do sell.
In the case of home ownership and CGT the following information is important to consider as we move into the example:
• Primary Residence: You must have lived in your primary residence for at least two years. There must, therefore, be a delay when selling your property to benefit from it being considered a primary residence.
• Acquisition Costs: Any money spent to acquire or improve an asset will be included in the CGT calculation. In the case of property this includes: the purchase price, transfer fees and duty, moving costs, installation costs, agent fees and advertising costs.
• Improvement Costs: The cost of any permanent improvements to the property (like a pool or renovation) can also be included.
• Maintenance Costs: Unfortunately costs for security, rates and taxes, insurance, interest on loans or repair costs are not included.
• Annual exclusion: As of 2016/2017 R40 000 of capital gain is excluded from the calculation
• Primary residence exclusion: The first R2 000 000 of any capital gain or loss is disregarded upon the disposal of a primary residence. This exclusion amount is the total per residence which will be split between the owners. If you own a property as a couple the exclusion is R1 000 000 per person.
• Rate of inclusion: Currently the inclusion rate is 33% of the Capital Gain for individuals
• Capital Gains Tax Rate: the capital gain amount is added to your annual tax liability which can significantly change the tax bracket you occupy.
• CGT liability: In the case of multiple owners the CGT liability they have is split according to their share of the capital gain. So full partners would each have 50% of the amount.
1) Citizen Y and the Primary Residence
The R118 800 in our example is then added to the annual taxable income of Y. So if Y has an annual salary of R188 000 a year and a tax rate of 18% the year of this capital gain Y will effectively be taxed on R306 800 which will bump Y into a higher tax bracket for the year.
Y will pay R65 388 in tax the year of the sale and of that R31 548 is for the capital gain. Not SO bad, right? What about if you sell something other than your primary residence?
2) Citizen X and the Sale of an investment property
If X also has the same salary as Y, X’s total tax liability for the year will be R896 000. A massive increase which will see X pay an eye-watering R286 790 of which R252 950 is paid for the capital gain.
Keep evidence of every property related expense
Every piece of paper that proves you incurred an expense in the acquisition (e.g. transfer fees), improvement (e.g. renovations) or sale (e.g. real estate agent commission) of your property can be worth literally thousands of Rand in the future.
Keep your tax liability in mind when selling:
Have you already made capital gains this financial year? Then you may have used up your entire exclusion. And remember that you are taxed on total gain for the year. Additional capital gains might push you into higher tax brackets.
Buying and selling with partners or as a couple can help reduce your tax burden
While you don’t benefit from increased primary residence exclusion you will benefit from splitting the gain which can keep you in a lower bracket and your individual exclusion can be used to further reduce your tax liability.