Rates of Capital Gains Tax

CGT only taxes the profit one makes on a property when it is disposed of, and not the entire value of the property.

Rates of Capital Gains Tax ("CGT")

CGT only taxes the profit one makes on a property when it is disposed of, and not the entire value of the property.

If the property is owned by an individual or a special trust, 25% of the capital gain made on disposal of the property must be included in their taxable income for the year of assessment in which the property is disposed of. The present maximum marginal rate of income tax for individuals is 40% and therefore individuals will pay a maximum of 10% of the capital gain.

If a property is owned by a company, a close corporation or an ordinary Trust, 50% of the capital gain must be included in their taxable income. The income tax rate for a company or close corporation is 30% and these entities will therefore pay 15% of the capital gain in CGT, while Trusts, whose income tax rate is 40%, will pay 20% of the capital gain.

If a capital loss is made on disposal of the property, it may be set off against any capital gains made in that year of assessment and, if no capital gains have been made, the loss may be carried forward to subsequent years of assessment.

For individuals, the first R10 000 of their capital gain in any year of assessment will be exempt and thus disregarded. This figure increases to R50 000 in the year in which the individual dies.

Non-residents are liable for the payment of CGT on the disposal of any immovable property owned by them in South Africa or on the disposal of an interest of at least 20% in the share capital of a company where 80% or more of the net asset value of the company is attributable to immovable property.

On death a person is deemed to have disposed of all property at market value hence triggering a CGT liability. For non-residents this deemed disposal applies to immovable property situated in South Africa. In addition on death a person is liable for estate duty at 20% (after deducting a R1.5million abatement from net assets and after deducting any CGT payable by virtue of the deemed disposal of the property). In the case of a non-resident estate duty would be levied on immovable property situated in South Africa (subject however to the terms of any applicable Double Death Duties Act entered into by South Africa with any other State). The only exception to the foregoing is where a person bequeaths his or her estate to his or her spouse the bequest is exempt form both CGT and estate duty.

CALCULATING THE CAPITAL GAIN, VALUATIONS AND KEEPING RECORDS

A capital gain is calculated by deducting the base cost of the property from the proceeds on disposal of the property. Disposal includes a sale, donation, exchange, vesting of the property in a beneficiary of a trust or emigration.

The following may be included in base cost:

1. The costs of acquiring the property, including the purchase price, transfer costs, transfer duty, VAT and professional fees (eg. attorneys and surveyors).

2. The costs of improvements, alterations, renovations, etc.

3. The costs of disposing of the property, including agent's commission, advertising costs, valuation costs (including valuing the property for CGT purposes) and professional fees.

One is not entitled to deduct expenditure on repairs, maintenance, insurance and rates and taxes.

It has therefore now become essential to maintain accurate records of the above costs. If such records are not retained, no deduction will be allowed from the proceeds to determine the capital gain. Clients should therefore be advised to start searching for and compiling records relating to the costs and dates of acquisition of the property and subsequent costs relating thereto.

All records must be kept for a period of 4 years from the date of submission of the income tax return for the year in which the capital gain or loss is reflected. If no return is lodged, the records must be kept for 5 years from the date of disposal of the property. If a person lodges an objection or an appeal against a CGT assessment, all the records must be kept for the above periods and thereafter until the assessment becomes final.

For properties acquired before 1 October 2001, the following methods of valuing the asset as at that date may be used:

1. The property's fair market value as at 1 October 2001, ie. the price obtainable on a sale between a willing buyer and a willing seller at arm's length in an open market. The valuation must be carried out within 2 years from the effective date (ie. before 30 September 2003), but the property must be valued according to its condition and in terms of the prevailing economic and market conditions as at 1 October 2001.

The Act does not prescribe who may perform the valuation. The taxpayer may employ any third party to assist in the valuation or may elect to value the asset himself or herself. The proviso, however, is that the onus of substantiating the valuation rests with the taxpayer. The valuation workings should therefore reflect the procedure for carrying out the valuation as well as the particular method used. In this regard, working papers should be retained, as outlined above.

All valuations will be subject to audit by the Commissioner and, where he is not satisfied with the valuation, he may either request further information or adjust the valuation. Such an adjustment is subject to appeal by the taxpayer.

If the valuation is determined by the Commissioner to have been inflated in order to limit the amount of the capital gain, penalties may be imposed. Valuers who are employed to carry out fair market valuations should therefore be cautioned against the danger of being sued for damages by clients in cases where the Commissioner rejects a valuation and levies penalties against the taxpayer for an incomplete declaration. Valuers are advised to include a disclaimer for any such loss in their valuations, warning that the valuation is to be relied upon by the taxpayer at his or her own risk.

According to the SARS website, the Commissioner may require the following information when auditing a particular valuation:

1. The valuation itself, including the basis of the valuation and the relevant calculations;

2. The physical address of the property;

3. The size of the property;

4. Details of any improvements to the property;

5. The plans of the property as at 1 October 2001;

6. Details of recent property sales in the same area;

7. The current municipal valuation of the property.

The valuation must be lodged with the taxpayer's income tax return in the year in which the asset is disposed of and must take the form of Annexure "A" annexed hereto. In the case of a property worth more than R10m, the valuation must be submitted to SARS with the first tax return submitted to SARS after 30 September 2003.

2. The time-apportionment base cost, ie. the percentage of the total gain that was made after 1 October 2001.

3. Where no fair market valuation was submitted and no accurate records maintained, the value as at 1 October 2001 will be deemed to be 20% of the proceeds on disposal.

All clients should be advised to carry out valuations within the 2 year period from 1 October 2001. This way, they will be able to decide later (when they sell the property) as to whether they wish to use the valuation method or the time-apportionment base cost. If no valuation has been obtained, they will have no choice. A valuation should also be carried out of a primary residence if now or in future the client may use the residence (or a portion of it) for trade purposes or if the ultimate capital gain might exceed R1-m.

PRIMARY RESIDENCE EXCLUSION

The primary residence exclusion will apply only to natural persons and special trusts. Upon disposal of a primary residence (on land not exceeding 2 hectares), any capital gains or losses up to R1-m can be excluded. This will not apply to properties registered in companies, close corporations or Trusts.

A person who does not ordinarily reside in South Africa cannot have a primary residence in South Africa.

When only part of the residence is used for residential and part for business purposes, an apportionment must be done. Likewise, where the residence is occupied for a part period, an apportionment must be done but, where the residence was not inhabited because it was being offered for sale or was being erected or renovated or had been rendered accidentally uninhabitable, the exemption will apply for a period not exceeding 2 years.

If the owner is employed or trading more than 250km from his or her residence and lets it for a period not exceeding 5 years, the exemption will apply if the owner lived in the premises for a continuous period of at lease 1 year prior to and after the letting period and does not treat any other residence as his or her primary residence during that period.

Where more than one person holds an interest in a primary residence (eg. spouses married to each other out of community of property), the exclusion will be in proportion to the interest held by each party in the residence.

INTERIM PROVISIONS

The legislation makes provision for individuals to transfer properties back from companies, close corporations and Trusts into their own names free of transfer duty as well as free of stamp duty in respect of the registration, substitution or cession of a mortgage bond or transfer of shares in a share block company. The requirements to qualify for this exemption are as follows:

1. The residence must be acquired by an individual and must, after the transfer takes place, constitute that individual's primary residence.

2. The acquisition of the property by the individual must take place after 20 June 2001 (the date of promulgation of the Act), but before 30 September 2002, so time is running out!

3. The registration of the transfer must take place on or before 31 March 2003.

4. In the case of a company or close corporation, the individual and/or his or her spouse must have held all of the equity share capital of the company or member's interest in the close corporation from 5 April 2001 until the date of registration of the transfer.

5. In the case of a Trust, the individual must have either disposed of the property to the Trust by way of donation, settlement or other disposition or must have financed all the expenditure actually incurred by the Trust to acquire and to improve the residence.

6. In both of the abovementioned cases, the individual and/or his or her spouse must have ordinarily resided in the residence and used it mainly for domestic purposes from 5 April 2001 until the date of registration of the transfer.

Individuals should be cautioned against hasty decisions to make use of the exemption to transfer properties into their own names as the potential saving in CGT should be weighed up against the transfer duty advantages of having a property registered in the name of a company or close corporation as well as the advantage of protection against creditors afforded by these entities. In addition, the Trust remains one of the most useful tools in reducing the value of a taxpayer's dutiable estate for estate duty purposes by pegging the value of growth assets in the estate and through the use of tax-free annual donations to reduce the value of loan accounts. It should also be noted that CGT is a tax only on the gain which has accrued after 1 October 2001, while estate duty is a tax on the full value of the property. Taxpayers are advised to engage in a comprehensive estate planning exercise prior to making a decision as to whether or not to avail themselves of the primary residence exemption.

Bregman Attorneys

Rates of Capital Gains Tax