What is Capital Gains Tax?
For the average taxpayer, Capital Gains Tax may be an unknown entity but it is likely to affect you at some point in your life. You may even be surprised to know that it is not a standalone tax and actually forms part of income tax.
After successfully being used in many first world countries, Capital Gains Tax was introduced in South Africa taking effect from October of 2001. Capital Gains Tax was implemented to close various loopholes in the existing tax system and widen the tax net, in the hopes that personal taxation could decrease as a result.
In Laymen’s terms, Capital Gains Tax applies when you sell an asset for more than you purchased it. This is referred to as a ‘Capital Gain’. Taxpayers will be taxed on the profit they made from the sale. Therefore Capital Gains Tax is really a tax on the resale of assets. These ‘Capital Gains’ are however taxed at a lower effective rate than your normal income.
Who is required to pay Capital Gains Tax in South Africa?
All South African residents are required to pay Capital Gains Tax as well as any non-residents who sell fixed property of a capital nature in the borders of South Africa.
Which assets are included / excluded from Capital Gains Tax?
Often if someone is familiar with Capital Gains Tax, it is likely through the sale of property. But if you are a property owner, what does this mean for you?
If you are selling your primary residence, it is smaller than two hectares and the profit you are set to make is less that R1 million, in most cases, you will be free of paying Capital Gains Tax.
However, if you are selling a second property and it is not occupied as a primary residence, you will be liable for Capital Gains Tax. Similarly, if you have allocated a section of your primary residence for business use, you are required to pay Capital Gains Tax on that portion.
Lastly, if your business is registered in the name of a company, trust or cc, you are also liable for Capital Gains Tax.
Assets incurring Capital Gains Tax include:
- Any primary residence owned by a company, trust or cc
- Properties let to tenants
- Second properties including holiday homes
- Portion of a primary residence that is used as an office or let out
- Caravans and boats (unless used as a primary residence)
- Sale of a business
- Investments including shares, policies, etc
Assets excluded from Capital Gains Tax include:
- Primary residence in your name providing the property is not bigger than 2Ha and the profit does not exceed R1 000 000
- Private motor vehicle, if not used for business
- Any disability, illness or defamation payout
- Profit from the sale of small business due to retirement or ill-health (not exceeding R500 000 in that person’s lifetime )
- Personal belongings including jewellery, art, clothing, etc
- Winnings from a competition, lottery, casino, etc
Calculating Capital Gains Tax
There are many factors for each asset type that need to be taken into consideration during the calculation of Capital Gains Tax. If you are unsure, please contact a tax adviser who can provide you with the correct advice.
If you are looking for friendly, efficient tax advice, speak to tax consultant Brett from Dirmeik Consulting on 021 421 4444.