The ins and outs of Capital Gains Tax
Although the large majority of property transactions will not be subject to Capital Gains Tax (CGT), it is still important for prospective sellers to understand the implications that could have on their sale, should their home be sold for more than the primary residence exclusion threshold, says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa.
“Forming part of an individual’s income tax, CGT is part of an ongoing reform programme which was introduced in South Africa in October 2001. The tax pertains to the disposal of an asset such as an immovable property or any capital sale of assets globally, where the proceeds exceed its base cost,” Goslett explains. “The tax applies to South African resident taxpayers, trusts and companies. Non-residents are liable to pay CGT only on the sale of their immovable property in South Africa. Additionally a withholding tax applies to non-resident sellers of immovable property in terms of section 35A of the Act. The amount withheld by the buyer serves as an advance payment towards the seller’s final income tax liability.”
Goslett says that although CGT was only introduced in this country 15 years ago, it was implemented in many of the countries that South Africa trades with a few decades ago. While there are numerous capital gains or losses on the disposal of an asset that are subject to taxation, there are instances where transactions are exempt due to certain concessions. The conditions pertaining to these exclusions are found in the Eighth Schedule to the Income Tax Act, 1962 (the Act), which determines a taxable capital gain or assessed capital loss.
With regard to the sale of a primary residence, there is exclusion on the first R2 million of any capital gain or loss. “If a property defined as a primary residence is sold for a capital gain of R2.5 million, the first R2 million will be disregarded and only the remaining R500 000 would be subject to taxation,” says Goslett.
He notes that in terms of the Act, a primary residence is defined as any structure, boat, caravan or mobile home, which is used as a place of residence by a natural person. Either a natural person or a special trust must own an interest in the residence. The owner, their spouse or a beneficiary of the special trust, must ordinarily reside in the property as their main residence and it must predominantly be used for domestic purposes. In cases where the property has been used for business purposes, the exemption will be apportioned for those periods where the property is not used as a primary residence.
According to Goslett, in the instance where a primary residence is jointly registered in the names of two people such as a husband and wife, each would benefit from the residential exclusion according to their interest that residence. If each spouse holds a 50% share in the property, each would qualify for a primary residence exclusion of R1 million - provided they both reside in the home together and do not own separate primary residences. No exemption will apply on capital gain realised from the sale of an individual’s second home or holiday home.
Goslett says that there certain instances where the owner of the property will be treated as having been ordinarily resident for a continuous period of up to two years, even if they have not been living in the primary residence that period, provided the following circumstances apply:
• The primary residence has been accidentally rendered uninhabitable.
• The primary residence was in the process of being sold while a new primary residence was acquired or was in the process of being acquired.
• The property was being built on land acquired for the purpose of erecting a primary residence.
“It is important to remember that CGT applies to the capital gain or loss during a property sale and not on the purchase price of the property. In order to determine whether the taxation is relevant, there are a number of expenses that need to be deducted,” says Goslett.
He notes that for a seller to determine the capital gain or loss made during the transaction, they need to deduct the selling price of the home from the base cost of the property. The base cost is determined by combining the original price paid for the home, along with all costs incurred acquiring and selling the property. These costs would include transfer cost, transfer duty, agent’s commission, advertising costs, VAT and any professional fees. If the seller has receipts and invoices, they will also be able to include the costs of improvements, alterations and renovations - routine maintenance, insurance and rates and taxes may not be included. “It is essential for homeowners to keep accurate records of the money they spend on their property. If they are unable to prove any costs through their records, they will not be able to deduct them from the proceeds to determine the capital gain,” says Goslett.
Once the base cost has been determined, it is then possible for SARS to calculate the CGT to be paid based on the net profit realised. Goslett says that Section 26A of the Act provides that 33.3% of the capital gain must be included in the seller’s taxable income for the years 2013 to 2015, and will be taxed according to their tax bracket. Government has proposed that the CGT inclusion rate for individuals be raised to 40% from March 1 this year. The CGT is payable when the individual’s income tax return is submitted at the end of the financial year during which the property was sold. “All records should be kept for at least four years after the date that the income tax return reflecting the capital gain or lose is submitted,” advises Goslett.
“Property tax can be highly complicated, so it is always advisable for sellers to seek the advice of a professional tax consultant who can point them in the right direction regarding CGT,” advises Goslett. “An expert tax consultant or conveyancing attorney can offer invaluable guidance through the submission process,” he concludes.
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