You’ve probably heard of the term capital gains tax at some point or another. But what exactly is it? We’ve summed up everything you need to know about capital gains tax (CGT) for both South African and non-South African residents below.
Get To Know CGT: South African Residents
CGT isn’t a separate tax. Instead, it forms part of income tax. It was introduced into our South African law in October 2001, and it’s paid on the increased value of a Seller’s immovable property when it’s sold. In other words, when immovable property is discarded, the Seller becomes responsible for the CGT payment on any profit made regarding that property.
How Is CGT Calculated?
CGT is calculated on the difference between the purchase price which was initially paid for the property and the price for which the property is eventually sold. However, transfer costs, property practitioners’ commission, and the documented costs of any capital improvements to the property (which refers to any items which increase the property’s value and don’t comprise the property’s maintenance) can be deducted from the capital gain.
For individuals
40% of the capital gain is added to the Seller’s taxable income, and the Seller’s marginal tax rate will determine the amount of tax due to SARS, which amounts to 18% of the capital gain.
For companies
22.4% of the capital gain is added to the Seller’s taxable income, and the Seller’s marginal tax rate will determine the amount of tax due to SARS, which amounts to 18% of the capital gain.
For Trusts
36% of the capital gain is added to the Seller’s taxable income, and the Seller’s marginal tax rate will determine the amount of tax due to SARS, which amounts to 18% of the capital gain.
Exemption of Primary Residence
In cases where the primary residence is registered in the name of an individual, a primary exemption is applied. In this case, any capital gain or loss up to R2 million can be excluded. The two requirements for this are:
1. The property should not be registered in the name of a company, close corporation
or a trust, but instead be registered in the Seller’s name.
2. The property needs to be the Seller’s primary residence, i.e. the Seller needs to
permanently live in the property and it can’t be an additional investment property or a holiday
home.
If these two requirements are applied, the first R2 Million capital gain is exempt from CGT. In
other words, CGT will only be applicable once the Seller generates more than a R2 million
increase. If the property isn’t registered in the Seller’s name, or if it’s the Seller’s additional
property, then these exemptions won’t be applicable and the Seller will therefore need to pay
CGT on the full capital gain.
Get To Know CGT: Non-South African Residents
With regards to Section 35A of the Income Tax Act, the Conveyancer is pressed with the
responsibility to retain a portion of the purchase price if the Seller is not a resident of South
Africa and if the price the property was purchased for was more than R2 million. This law
was placed into effect with the aim of ensuring that the liability to pay tax by a non-resident is
honoured.
Depending on the classes of persons, separate withholding rates are applicable:
If the Seller is a natural person, 7.5% of the purchase price is applicable.
If the Seller is a company, 10% of the Purchase price is applicable.
If the Seller is a trust, 15% of the purchase price is applicable.
The withholding amount applies to the full purchase price when the value of the property
exceeds R2 million. In cases where the property is owned by numerous owners, the
threshold exemption of R2 million will be applicable to each joint owner. Consequently, if the
selling price is not in excess of R2 million for each joint owner, Section 35A won’t be
applicable.
So How Do You Know If A Seller Is A South African Resident?
For Income Tax purposes, it’s important to know whether a Seller is a South African
Resident or not. In order to determine this, the following questions need to be answered:
Does the Seller mainly reside in South Africa during the financial year?
If answered no, then the physical presence test needs to be done on the Seller. In other
words, you’d need to know if:
The Seller was present in South Africa for more than 91 days during the current financial
year.
The Seller was present in South Africa for 91 days in total during each of the five years
preceding the current financial year.
The Seller was present in South Africa for 91 days in total during those 5 preceding years.
If answered yes, then the Seller isn’t a resident for withholding tax purposes and Section
35A of the Income Tax Act won’t be applicable. Additionally, the Conveyancer won’t retain
any amount due to SARS in terms of Section 35A. Subsequently, the above is only
applicable if the Seller is a resident, in which case Section 35A of the Income Tax Act isn’t
applicable. However, if the Seller wasn’t in South Africa for 330 full days consecutively, then
the Seller will be considered a non-resident from the date they terminated their physical
presence in South Africa. Additionally, the above isn’t applicable if the Seller is a non-South
African resident, in which case the Conveyancer will withhold tax.
