Capital Gains Tax
Capital Gains Tax [CGT] is a transaction based tax where gains or losses are brought to account annually by inclusion in the tax payer’s annual income tax return.
CGT only taxes the profit on the sale of the property and not the total value of the property. The tax rates for the purpose of calculating the tax payable is as follows:
25% of profit @ tax payer’s marginal tax rate [maximum 40%]
Close corporations and companies:
66.6% of profit @ 28% tax rate
50% of profit @ 40% tax rate
The effective date of this tax was 1 October, 2001 and a valuation should have been made as at that date. Profits accrued from this date on the sale of certain capital assets will be taxed. All natural and legal persons, residents and non-residents, are liable for CGT.
The first R1 500 000 of profit for the primary owner occupied residence if it is registered in the name of a natural person or special trust will be excluded. It stands to reason that a non-resident cannot claim this exemption.
All parties involved in the sale of immovable property, must obtain clearance from South African Revenue Service (SARS), that their income tax has been paid and that their tax affairs are in order before transfer can take place.
All parties involved in the sale of a property will be required to produce the necessary documents according to the Financial Intelligence Centre Act (FICA) requirements.
If the Seller is a non-resident, in terms of Section 35A of the Income Tax Act, the Conveyancer, on behalf Purchaser, is required to withhold an advance in respect of the Seller’s normal tax for the year of assessment during which the property is disposed of by the Seller in the sum as set out hereunder:
- 5% of the purchase price if the Seller is a natural person;
- 7.5% of the purchase price if the Seller is a Company; or
- 10% of the purchase price if the Seller is a trust.
The Seller undertakes to furnish the Conveyancers with a written directive issued by the South African Revenue Services stating that:
- No amount as referred to above, be withheld by the Conveyancers, or
- A reduced amount be withheld by the Conveyancer for the purposes of Section 35A of the Income Tax Act.
Section 35A shall not apply to property disposed of by a non resident Seller for a total purchase consideration not exceeding ZAR 2 000 000.
The purchaser will be responsible for paying the transfer costs, transfer duty and bond registration costs on transactions. If VAT is payable, it will be paid by the purchaser unless the transaction is zero rated between two VAT registered entities.
Transfer duty is payable at the following rate on transactions which are not subject to VAT:
Acquisition of property by natural persons:
R 0 – 750 000 0%
R 750 001 – 1 250 000 3%
R 1 250 001 - 1 750 000 R 15 000 + 6% on value above R1 250 000
R 1 750 001 - 2 250 000 R 45 000 + 8% on value above R 1 750 000
R 2 250 001 and above R 85 000 + 11% on value above R 2 250 000
Acquisition of property by persons other than natural persons (eg. Companies, close corporations and trusts:
8% of total value.
Where a transaction for the sale of shares in a property owning company (or the interest in a close corporation), transfer duty is payable on the value of the property as well as Securities Transfer Tax at the rate of 0.25% of the value of the shares (or interest). If the purchasing entity is registered for VAT and the transaction was not zero rated for VAT, then the transfer duty can be claimed back as an input tax.
Estate duty is levied at a flat rate of 20% on all property of residents and South African property of non-residents. A basic deduction of R3.5 million is allowed in the determination of an estate’s liability for estate duty as well as deductions for liabilities, bequests to public benefit organizations and property accruing to surviving spouses.
The tax consequences facing an investor in fixed property
Investing via a Company or Close Corporation
If a company or close corporation acquires residential property, transfer duty is payable at the rate of 8% on the price paid for that property. Rent received by the company or close corporation, net of expenditure incurred in letting out the property, will be taxed the rate of 29%.
If a company or close corporation distributes its full after tax income to its shareholders or members, as the case may be, the all inclusive tax rate amounts to 36.89% which is marginally less than the maximum marginal tax rate applicable to natural persons.
Where the property is disposed of by the legal entity, CGT is payable at an effective rate of 14.5% (that is 50% of the gain is included in taxable income and subjected to tax at 29%). Further-more, STC is payable on the capital gain to the extent that it related to the period after 1 October 2001 amount to 24% being the STC and CGT payable.
In most cases, purchasers seeking to acquire fixed property will not acquire the shares in legal entity owning the property because of the uncertainty regarding the legal liabilities that may be attached to the legal entity and also the contingent STC and CGT exposure facing the entity. Purchasers would therefore be well advised to acquire the fixed property out of the company and to place the fixed property into a new legal entity thereby significantly reducing the purchaser’s risk relating to the transaction.
Investors in fixed property can acquire fixed property directly and incur the tax costs as specified above and face the legal risks attaching to the type of entity through which fixed property is acquired.
Where an investor wishes to acquire fixed property indirectly they can currently do so by acquiring units in a property unit trust or linked shares and debentures in a variable loan stock company. If REITs are introduced into South Africa that will diversify the investments in property available to investors and the tax consequences relating thereto must be considered compared to the other forms of property investment available.