BRIEF GUIDE TO CAPITAL GAINS TAX FOR RESIDENTS: This brief guide is intended to outline in very broad and brief terms, the key principles that form part of Capital Gains Tax legislation in South Africa relating to immovable property.
When is Capital Gains Tax (CGT) chargeable and payable?
The occurrence that causes any CGT liability is the disposal of an asset, for instance a residential property. Unless such a disposal occurs, no gain or loss arises.
What are affected capital assets?
Affected capital assets are considered to be property of any kind, including assets that are movable or immovable, tangible or intangible, excluding trading stock and mining assets qualifying for an income tax deduction as capital expenditure.
Will the sale of my primary residence be subject to CGT?
A primary residence exclusion of a gain of up to R1 500 000.00 means that most capital gains on the sale of a home will not be subject to CGT.
What is a primary residence?
It must be a structure, including a boat, caravan or mobile home, which is used as a place of residence by a natural person. A natural person or special trust must own an interest in the residence, and the natural person with an interest in the residence, beneficiary of the special trust, or spouse of that person or beneficiary must ordinarily reside in the home and must use it mainly for domestic purposes as his or her ordinary residence.
Where the primary residence is disposed of together with the land on which it is situated (including unconsolidated adjacent land) the one million exclusion will apply to land:
- To the extent that it does not exceed two hectares;
- That it is used mainly for domestic and private purposes together with the residence, and is disposed of at the same time and to the same person as the residence.
Is a primary residence exclusion an unlimited exclusion?
The exclusion will not apply to any capital gain or loss in excess of one million rand. The exclusion will further only apply in respect of two hectares of property used for domestic or private purposes. The exclusion furthermore will not apply to any capital gain or loss in respect of the period on or after the valuation date when the person was not ordinarily resident in the primary residence.
Will it apply to a residence held through a company or trust?
No, the owner is not a natural person.
How are capital gains / losses determined?
A capital gain or loss is the difference between the base cost of an affected asset and the consideration realised or deemed to be realised upon the disposal or deemed disposal of that same asset.
What is base cost?
Base cost means the cost of an asset which is deducted from any proceeds upon disposal, to determine whether a capital gain or loss has been realised. Base cost includes those costs actually incurred in acquiring, enhancing or disposing of a capital asset that are now allowable as a deduction from income. The following are included in the base cost of an asset:-
Incidental costs of acquisition and disposal
Capital costs of maintaining title or rights to an asset
Costs of improvement or enhancement
Costs of ownership of assets used exclusively for business purposes, listed shares and units in a unit trust scheme
Is there any relief on the inclusion of a capital gain in taxable income?
The following inclusion rates are to be applied to nett capital gains:-
Legal persons (including companies, close corporations and trusts) – 50%
Natural persons (individuals and special trusts) – 25%
In other words, a company will only include fifty percent of the nett capital gain in taxable income (fifty percent is exempt from tax) and an individual will only include twenty five percent of the nett capital gain in taxable income (seventy five percent is exempt from tax).
PURCHASE OF PROPERTY IN SOUTH AFRICA BY NON-RESIDENTS:Any person who is a non-resident is entitled to purchase property in South Africa. A non-South African may pay for the property in cash or borrow up to 50% of the purchase price from a financial institution or a South African. Normally loans are obtained from commercial banks. It is within the discretion of the commercial bank as to whether they are prepared to loan any monies to the non-South African in respect of the purchase of the property but as stated above can only exercise such discretion up to a maximum amount of 50% of the purchase price of the property. If a loan is in fact granted, the non-South African will be required to open a bank account at a South African commercial bank which account will be referred to as a non-resident account. The same is to enable the bank to process the loan repayments.
PURCHASE OF PROPERTY BY IMMIGRANTS TO SOUTH AFRICA: Once a prospective immigrant has signed the “immigrants declaration and undertaking” issued by the commercial banks in South Africa, such applicant is no longer affected by the restrictions referred to in the paragraph above and can in fact loan the full amount of the purchase price. Such person must of course apply for and obtain permanent residence as soon as possible. The fact that a party has purchased property does not ordinary affect the party’s ability to obtain a permanent resident’s permit in South Africa. However, one can apply for permanent resident status in the “financial independence” category on the basis that the person in question has invested at least R1 500 000,00 in foreign funds in South Africa. In addition, the fact that a person has purchased a permanent residence in South Africa is a factor taken into account when assessing an application for permanent residence on the basis that a person wishes to retire to South Africa.
REPATRIATION OF MONIES FROM SOUTH AFRICA: Any monies brought into South Africa by a non-South African may be repatriated at any time. Any profit made can also be repatriated after the capital gains tax payable in respect of the same and other taxes due and payable have been paid. After 5 years from the date of the signature of an immigrant’s declaration and undertaking, an immigrant will no longer be able to repatriate the monies on this basis and will then be subject to the same exchange control restrictions as are imposed upon the residents of South Africa.