Although it does not apply to every property sale, it is important for property buyers and sellers to be aware of the implications of Capital Gains Tax (CGT) and how it could affect them in their future property transactions.
Implemented on the 1 October 2001 as part of an ongoing tax reform programme in South Africa, CGT is tax payable by the seller of an asset or fixed property on the profit made from the transaction. The tax applies to all individual South African resident taxpayers, companies, close corporations and trusts, and it includes any capital sales made from the sale of their world-wide assets. Non-South African resident taxpayers who sell immovable property in South Africa are also liable to pay CGT.
There are certain exclusions applicable to CGT, for example, if an individual sells their primary residence they will need to make more than R2 million profit on the sale before CGT is applicable. At the recent 2012 Budget speech it was announced that this exemption amount would change from its original threshold of R1,5 million to R2 million on all primary residences sold from 1 March 2012. This means that for any primary residence sold for R2 million or more, the first R2 million would not be subject to taxation.
A primary residence is defined as a property that is owned by a natural person, must be the main residence of the individual and must predominantly be used for domestic purposes. However, the exemption will be apportioned for periods where the property is not used as a primary residence or it is used for business purposes. Under certain circumstances the seller may leave the primary residence prior to the sale without losing concession, and the exclusion is extended to a special purpose trust.
In the case where a primary residence is registered in the joint names of a husband and wife, they would each benefit from their respective R2 million abatement on their share of the capital gain as both are considered to be taxpayers. However, both parties would have to reside in the property and a husband and a wife could not have two primary residences. No exemption will apply on capital gain realised from the sale of an individual’s second home or holiday home.
To calculate the capital gain of a transaction, sellers need to deduct the price of the property sold from the base cost of the property. The base cost is calculated by adding the original price paid for the property and the costs for buying and selling the property such as estate agent's commission, attorney fees and other fees for other professionals such as electrical and plumbing inspectors. The cost of any renovations which qualify as improvements to the property can also be included; however, costs of routine maintenance may not.
SARS will then calculate the CGT to be paid based on the net profit realised. The capital gain amount will then be added to the individual's income and taxed according to the tax brackets. The CGT becomes payable when the individual’s income tax return is submitted at the end of the financial year during which the property was sold.
In certain circumstances property tax can become complicated, and if unsure it is always advisable that buyers and sellers seek the expert services of a tax consultant or property lawyer who can offer guidance through the process.