1. WHEN WAS CAPITAL GAINS TAX (‘CGT’) INTRODUCED IN SOUTH AFRICA?:
1 October 2001
2. WHAT IS CGT?:
In the context of a transaction in terms whereof an immovable property (‘property’) is sold, CGT is the tax payable to SARS on the capital gain (or profit) that is made by an owner when he sells his property.
3. HOW IS CGT CALCULATED?:
There are two elements to the calculation. Firstly, the capital gain must be calculated and secondly, the percentage at which the gain is taxed must be established.
Simply put, CGT payable = capital gain x …. %
(Note that and exclusion of R2 000 000 is given whenever a primary residence is sold by a natural person or special trust, but we will come back to this aspect later).
3.1 CALCULATION OF THE CAPITAL GAIN:
The capital gain is the nett sale price (in other words after deduction of estate agent’s commission if applicable) less the base cost of the property.
The base cost is the sum total of the following:
- The gross purchase price (inclusive of agent’s commission if applicable); and
- The transfer costs paid when the property was purchased; and
- The cost of renovations and additions made to the property.
Note that the following are not included when calculating the base cost:
- General maintenance costs;
- Bond payments;
- Rates & taxes, levies and water & electricity charges.
3.2 THE PERSENTAGE USED TO CALCULATE THE CGT PAYABLE:
The percentage used depends firstly on whether the seller is a natural person, a special trust (which is a trust used to administer the assets and affairs of persons with serious mental or physical disabilities, or a testamentary trust created for minor children), a company or a (normal) trust.
3.2.1 A natural person-
- The rate used is relative to the income tax rate that the person pays on his income;
- the maximum rate is 18 % (for persons with a yearly gross income of more than R1 577 301 who pay income tax at the rate of 45%);
- the minimum rate is 7.2% (for persons with a yearly gross income of less than R216 200.00 who pay income tax at the rate of 18%).
3.2.2 A special trust-
The rate is the same as for a natural person.
3.2.3 A company-
The rate is fixed at 22.4%.
3.2.4 A (normal) trust-
The rate is fixed at 36%.
Examples of these trusts are family trusts and business trusts.
4. THE PRIMARY RESIDENCE EXCLUSION:
Provided that the seller is a natural person or a special trust, the first R2 000 000 of the capital gain is disregarded for CGT purposes if a property being sold was used as a primary residence.
5. ANNUAL EXCLUSION:
An annual exclusion of R40 000 is granted to natural persons and special trusts.
6. SOME EXAMPLES:
6.1 John buys a house in 2005 for R2 000 000. His transfer cost is R100 000 and the house is his primary residence. During 2010 he adds on two rooms to the house at a cost of R400 000. He sells the property in 2021 for R4 000 000 (after deduction of agent’s commission).
Calculation of CGT payable:
- The nett sale price is R4 000 000;
- The base cost is R2 000 000 plus R100 000 plus R400 000 which brings us to a total of R2 500 000;
- The capital gain is therefore R1 500 000;
- The CGT payable is R0, because it is a primary residence that was sold, and the capital gain is lower than primary exclusion of R2 000 000.
6.2 Let’s take the same example as above except that John sells the property for R6 000 000. Let’s also assume John is a high earner and pays income tax at the maximum rate of 45%.
Calculation of CGT payable:
- The net sale price is R6 000 000;
- The base cost is still R2 500 000;
- The capital gain is now R3 500 000;
- CGT payable is (R3 500 000 capital gain less the primary exclusion of R2 000 000 less the yearly exclusion of R40 000) x 18% = R262 800.
6.3 Susan, who owns a house in which she and her family lives, purchases a ‘buy to let’ unit for R1 000 000 during 2007. Her transfer cost is R50 000. She adds two additional bathrooms to the unit during 2015 at a cost of R200 000. She sells the unit at a price (after deduction of agent’s commission) of R2 000 000 in 2021. Let’s assume that Susan pays income tax at the minimum rate of 18%.
Calculation of CGT payable:
- The nett sale price is R2 000 000;
- The base cost is R1 000 000 plus R50 000 plus R200 000 which brings us to a total of R1 250 000;
- The capital gain is R750 000;
- The primary residence exclusion does not apply;
- The CGT payable is (R750 000 capital gain less the yearly exclusion of R40 000) x 7.2% =R51 120.
6.4 Khanyi purchases a house in 2016 for R1 500 000 in the name of a company called XYZ (Pty) Ltd. The transfer cost is R75 000 and the property is used by her and her family as a primary residence. She sells the property in 2021 for R2 500 000 (after agent’s commission was deducted).
Calculation of CGT payable:
- The nett sale price is R2 500 000;
- The base cost is R1 500 000 plus R75 000 totaling R1 575 000;
- The capital gain is R925 000;
- The primary residence exclusion does not apply as the property is not owned by a natural person or a special trust. The yearly R40 000 exclusion also does not apply as it only applies to natural persons and special trusts;
- CGT payable is R925 000 x 22.4% = R207 200.
7. SOME PROBLEMATIC ISSUES:
How is the CGT calculation affected if the property being sold:
- Was purchased prior to 1 October 2001?;
- Was used as a primary residence for a limited period and thereafter rented out to someone else?;
- Was simultaneously used partly as n primary residence and partly as a home office?
Lets look at the issues one by one.
7.1. THE PROPERTY WAS PURCHASED PRIOR TO 1 OCTOBER 2001:
The important principle to remember is that only the portion of the capital gain that occurred from 1 October 2001 is subject to CGT.
Bearing the said principle in mind, the question is really how the base cost should be adjusted in the formula for calculation of the CGT that is payable.
SARS allows for 3 methods to adjust the base cost:
- Firstly, if a valuation was done of the property as at 1 October 2001, the said valuation will be taken as the base cost of the property when calculating the CGT payable upon the sale of the property irrespective of when the property is sold;
- Secondly, 20% of the nett proceeds of the property can be deemed as the base cost;
- Thirdly, a time apportioned base cost can be used. This method can be illustrated with the following example:
A property that was acquired on 5 December 1998 for R250 000 (consisting of the purchase price and transfer costs) is sold on 20 June 2018 for R450 000.
The number of years from acquisition until 1 October 2001 is taken as 3 years (a part of a year is treated as a full year). The number of years from 1 October 2001 until the sale is taken as 17 (once again a part of a year is treated as a full year).
Accordingly, the time apportioned (adjusted) base cost is calculated as follows: R250 000 plus ([R450 000 less R250 000] X 3/20 which equals R280 000.
Any one of the 3 methods may be used when calculating the CGT.
7.2 THE PROPERTY IS USED AS PRIMARY RESIDENCE AND THEN RENTED OUT:
The capital gain on the sale needs to be apportioned between primary residence use and non-primary residence use.
Let’s explain by way of an example:
Andrew buys a property on 1 January 2011 for R2 000 000 and his transfer costs are R100 000. He uses it as his primary residence for 5 years whereafter he moves out and he rents it out to a tenant as from 1 January 2016 for 3 years. He then sells the property on 1 January 2019 for R3 000 000.
The CGT is calculated as follows:
- The base cost is R2 100 000;
- The capital gain is R900 000;
- The portion of the capital gain attributable to the property’s use as primary residence is R900 000 x 5/8 which equals R562 500. The primary residence exclusion is R2 000 000 and therefore no CGT is payable in regard to the capital gain during the 5-year period;
- However, CGT will be payable in regard to the capital gain during the last 3 years during which the property was rented out and the calculation is as follows:
The portion of the capital gain attributable to the property’s non-residence use is R900 000 x 3/8 which equals R337 500.
If we assume that Andrew’s income tax rate is 45%, the CGT payable will be: (R337 500 less R40 000 annual exclusion) x 18% =R53 550.
7.3 PROPERTY IS USED AS PRIMARY RESIDENCE AND HOME OFFICE SIMULTANEOUSLY:
In this situation, the capital gain must be apportioned between the primary residence use and business use.
Let’s use the following example, which is somewhat similar to Andrew’s example above to explain:
Margaret buys a house during 2015 for R2 000 000 and her transfer cost is R100 000. The property is 100 square meters in size and she uses 90 square meters as her primary residence and a corner of 10 square meters as her office. She sells the property in 2021 for R3 000 000.
The CGT payable is calculated as follows:
- The base cost is R2 100 000;
- The capital gain is R900 000;
- The portion of the capital gain that is attributable to the primary residence is R900 000 x 9/10 which equals R810 000;
- As the primary residence exclusion is R2 000 000, no CGT is payable in regard to the 90% of the house used as primary residence;
- The portion of the capital gain that is attributable to the home office is R900 000 x1/10 which equals R90 000. This gain is subject to payment of CGT which is calculated as follows, assuming that Margaret’s income tax rate is 45%;
CGT = (R90 000 less R40 000 annual exclusion) x 18% which equals R9 000
8. SOME RELEVANT POINTS IN CLOSING:
- CGT forms part of an individual/company/trust’s income tax obligations and it is declared in the person/entity’s annual tax return. Payment thereof forms part of the amount due to SARS and will consist of income tax and CGT;
- A capital loss can be carried forward and is available for set-off against subsequent capital gains;
- A person can only have one primary residence at a time.
- If the property being sold is registered in the names of two persons or more, the capital gain will be split proportionately between them when calculating the CGT payable by each of them. Likewise for the primary deduction of R 2 000 000 and the annual exclusion of R 40 000;
- The CGT payable by pensioners are calculated the same as stated in paragraph 3.2.1 as pensioners are also taxed at between 18% and 45% on their monthly pension;
- The following is a very simplified rule of thumb for the calculation of CGT when a property is sold:
When a natural person or a special trust sells his/its property, the CGT payable is on average 12,6% of the profit (the capital gain). If the property being sold is a primary residence, R2 000 000 is deducted from the profit and the CGT is then 12.6% thereof;
When a company sells its property, the CGT payable is 22.4% of the profit;
When a trust sells its property, the CGT payable is 36% of the profit.
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Notes prepared by: Johann Nortje
J Nortje Attorneys Inc
012 365 3414
083 600 4425
14 April 2021