Capital gains tax & typical property transactions in South Africa
Upon the disposal of immovable property, the seller becomes liable for the payment of Capital Gains Tax (“CGT”) on any capital gain (profit) that has accrued in respect of that property since the introduction of the tax by the South African Revenue Services (SARS) on 01 October 2001.
RATES AT WHICH CGT IS CALCULATED
- Individuals (Natural Persons)
40% of the gain made on the disposal of immovable property is included in the individuals’ taxable income for the year of assessment within which the property has been sold. As the maximum marginal rate of income tax for individuals is 45% of taxable income, it stands to reason that individuals will effectively pay a maximum of 18% of the capital gain to SARS. - Companies/Close Corporations (CCs)
80% of the capital gain made on disposal of immovable property is included in the taxable income of the entity. As the tax rate for companies and CCs is currently 28%, (and will decrease to 27% as of 01 March 2023) these entities will effectively pay 22.4% of the capital gain to SARS. - Trusts
Again, 80% of the capital gain made on disposal of immovable property is included in the taxable income of the trust. As the income tax rate for trusts is 45%, an effective 36% of the capital gain will be payable to SARS. EXCLUSIONS - Primary Residence (Individuals/Natural Persons)
Most primary residences won’t be subject to CGT because the first R2 million of any capital gain or loss on the sale is disregarded. This means that you need to make a capital gain of more than R2 million in order to be subject to CGT (before 01 March 2012 the primary residence exclusion was R1.5 million). In addition, if the proceeds on disposal of a primary residence do not exceed R2 million, any resulting capital gain or loss must be disregarded. (This rule is subject to certain conditions, for example, no part of the residence must have been used for the purposes of trade.) This exemption only applies to natural persons and consequently a company, close corporation or trust may not claim it. A person who does not ordinarily reside in South Africa can also not own a “primary residence” in South Africa. - Annual Exclusion
For each assessment year an annual amount, (the “annual exclusion”) is excluded from the sum of your capital gains and losses for CGT purposes. The annual exclusion in the 2021/2022 tax year is R40 000.00 (increased from R30 000.00 in the 2015/2016 tax year). Please note that this is in addition to the primary residence exemption, so an individual taxpayer selling his or her home can effectively make a gain of R2 040 000.00 before being subject to any CGT.
CALCULATION OF THE GAIN:
- The capital gain is calculated by deducting the base cost from the proceeds on the disposal of the property. Certain items may be included in the base cost for the purposes of calculating CGT:
- The costs incurred in acquiring the property, ie the purchase price, transfer duty, VAT, transfer costs and any other professional fees
- The cost of any improvements, alterations, renovations etc. (Note: A distinction is drawn between improvements, which are deductible and maintenance expenditure, which is not)
- The costs associated with the disposal of the property, including Estate Agent’s commission, advertising costs and professional fees.
The “base cost” may be calculated in one of the following ways where the property was acquired prior to 01 October 2001:
- Afair market valuation of the property as at 01 October 2001. This would have had to have been compiled prior to 30 September 2004
- The “time-apportionment” method of value determination as at 01 October 2001
A deemed value may be allocated to the property based on the purchase price achieved on disposal.
NON-RESIDENTS AND THE S35A INCOME TAX ACT (WITHHOLDING TAX)
Non-residents are liable for the payment of CGT and SARS introduced s35A in 2007, to provide for the collection of CGT prior to the repatriation of the proceeds of the sale. This imposes an obligation on the purchaser to withhold a portion of the purchase price and pay this over to SARS, to provide for the seller’s CGT liability. The Estate Agent and the Conveyancer are obliged to inform the purchaser of this in writing. The Agreement of Sale will regulate the relationship between the seller, the purchaser and the Estate Agent and it is often difficult to remedy any errors or omissions once signed by the parties. In order for s35A to apply, two factors are vital: – the seller must be a non-resident, and – the purchase price must exceed R2 million.
Please note that a 2014 SARS directive stipulates that the R2 million threshold will apply per seller ie where a property is owned jointly by 2 individual non-resident sellers, the purchase price must exceed R4 million to apply. Where both of these factors are present, the following amounts must be withheld: 7.5% where the seller is a non-resident natural person 10% where the seller is a non-resident company 15% where the seller is a non-resident trust.
PLEASE NOTE: This information is intended to set out the implications of CGT with regard to property transactions in broad strokes and is by no means exhaustive.
For further information, refer to SARS’ ABC of Capital Gains Tax for Individuals which can be downloaded at www.sars.gov.za Practically speaking, the Conveyancer will withhold the relevant portion of the purchase price, acting as the agent for the purchaser.
We recommend that any non-resident seller to whom this legislation applies approach SARS at the time of the sale and apply for a directive which will set out the actual CGT payable, to enable distribution of the proceeds accordingly upon registration of transfer.
PLEASE NOTE: While every effort has been made to ensure that the information contained in this article is correct, the author will not be liable for any loss suffered by any person due to any errors or omissions contained in the article.
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