There appears to be a lot of confusion as to when Capital Gains Tax (CGT) applies. While it doesn't apply to every property transaction, it is important for sellers to remain well informed and understand the implications pertaining to their particular transaction.
CGT was introduced in South Africa in October 2001. In short, it is tax payable by a seller on the profit that he makes from the sale of a fixed property or the capital acquired from the sale of assets globally.
CGT applies to all natural persons (individual South African resident taxpayers) as well as legal entities (companies, close corporations and trusts) and also includes foreign investors.
Exclusions from CGT can be found in the Eighth Schedule to the Income Tax Act, 1962 (the Act), which determines a taxable capital gain or assessed capital loss.
"When we look at the sale of a primary residence, the majority of sales transactions will not be subject to CGT because the first R2-million of any capital gain or loss on the sale is disregarded for CGT purposes," says Marsha Haupt Cooper, principal of Links Living. "The owner or their spouse must reside in the property as their main residence and it must predominantly be used for domestic purposes and registered in the name of the natural person (individual /owner or spouse name)."
When a residential property used for business purposes is sold, the CGT exemption will be apportioned for those periods where the property was not used as a primary residence.
There are some cases 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 during that two-year 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 before 1 March 2012 when the primary residence exclusion was R1.5-million. (In the budget speech of March 2012 the exemption on a primary residence was changed to R2-million.)
"The most important fact to remember is that the capital gain is attached to the sale price and not the purchase price of the property. This means that there are a number of expenses that will need to be taken into account to determine whether CGT is applicable or not i.e.:
• Sellers need to deduct the amount for which the property is sold from the purchase price. They then have to add all the costs they have incurred to acquire the property such as transfer costs and duties, attorney's fees, agent's commission and other services. These costs must include any renovations, which qualify as improvements to the property, and routine maintenance costs. The sum of these costs must be deducted from the sale proceeds.
• Only once this nett profit is determined, it is possible to calculate the CGT.
• Section 26A of the Act provides that a taxable capital gain must be included in the seller’s taxable income and will be taxed according to their tax bracket. The CGT is payable and will have to be submitted at the end of the financial year during which the property was sold.
"In the case where the primary residence is registered jointly in the names of the owner and their spouse, each one would benefit from the exclusion according to the percentage interest they hold in that residence," says Haupt Cooper. "In the case where each spouse holds an equal share in the property, each would qualify for a primary residence exclusion of R1-million, subject to the fact that both parties reside in the property together and do not own separate primary residences."
The sale of an individual’s second home or holiday home will have no exemption and full CGT will apply on the capital gain achieved.
Property tax is complicated and if sellers are unsure, it is always advisable to seek the advice of a professional CGT tax consultant. An expert tax consultant or conveyancing attorney can offer invaluable guidance and point the uncertain in the right direction.