PROPERTY REALITY
THE HOME OF RESIDENTIAL PROPERTY CALCULATIONS
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This page contains guidance on the capital gains tax implications relating to the sale of a residential property. The calculation of CGT can sometimes be quite complex and we therefore would like to point out that we only provide guidance on the basics of CGT. We recommend that you obtain advice on specific CGT issues from your accountant or tax planner.
Liability for CGT
Capital Gains Tax came into effect on 1 October 2001 and applies to all South African residents (for tax purposes) and foreign citizens who own fixed property in South Africa. It is therefore important to note that if you are a South African resident and own a property in any foreign country, you will be liable for CGT in South Africa when the property is sold for a profit. Some relief may however be available to you if you also incurred CGT in the country where the property is situated. Non-SA residents are liable for CGT when a property that is situated in South Africa is sold. In addition, SA residents need to be aware of the implications of article 35A of the Income Tax Act - this section of the Act applies only to properties where the purchase price exceeds R2 million. If a SA resident buys a property from a foreign citizen, the onus is on the buyer to withhold CGT upon settlement, otherwise the buyer may be held liable for the capital gains tax.
The estate agent and conveyance attorney are responsible for informing the buyer that the property is being acquired from a foreign resident. If these parties fail to do so, they can be held jointly liable for the capital gains tax that needs to be withheld but the amount of their liability is limited to the fees that they charged for the transaction. The amount of withholding tax is calculated based on a fixed percentage of the selling price and the rate depends on the legal form of the entity that sells the property - 7.5% for individuals, 10% for companies and 15% for trusts. The buyer is responsible for paying over the capital gains tax that is withheld to the South African Revenue Service.
Calculation of Capital Gains & Losses
A capital gain or loss is calculated by deducting the base cost of an asset from its selling price. The base cost of a property consists of the sum of the property purchase price, the capital costs that are incurred to improve the property (renovation costs), the transfer costs that are paid when the property is acquired and the costs that are directly related to the sale of the property (marketing costs, agents commission, etc.). Financing costs like interest, bond repayments and bond registration & cancellation fees relate to the financing of the property and can therefore not be included in the base cost of an asset.
If the property that is sold is used by an individual as a primary residence and the selling price is below R2 million, the property is exempt from capital gains tax. If the selling price of the primary residence is above R2 million, the first R2 million of the capital gain is excluded from capital gains tax. This seems like a large amount but most people tend to occupy their primary residences for a number of years and property owners therefore need to realize that a property of R1 million only has to grow by 11% per annum for 10 years and a property of R1.5 million only by 8.5% for 10 years to result in a capital gain that exceeds the exclusion amount.
It is therefore imperative to keep proper records of all the capital costs that are incurred while occupying your primary residence because you will have to produce supporting documentation for all of these costs in order to be able to deduct the costs for capital gains tax purposes. If you keep proper records of all qualifying costs, it could end up saving you a significant amount of capital gains tax! This principle is even more important for buy to let properties because there is no primary residence exemption. Also note that the primary residence exclusion does not apply to companies, closed corporations and trusts. The decision to register a primary residence in the name of one of these types of entities could therefore result in a higher CGT liability.
A separate general exclusion of capital gains tax is also provided for in the Act. This exclusion is applicable to all capital gains, not just those resulting from the sale of residential properties. The general exclusion is only available to individuals and amounts to R40,000 (accurate for the 2021 fiscal year).
Calculation of capital gains tax
Capital gains tax is not a separate form of income tax but forms part of the annual income tax assessment process. The capital gain that is realized from the sale of a residential property is included in the appropriate entity's taxable income in the assessment year in which the particular property is sold. The full capital gain is however not included in the calculation of taxable income. For individuals, only 40% of the net capital gain on all the assets that are sold during the particular assessment year is included in the income tax calculation and taxed based on the sliding income tax scale that is applicable to individuals. For companies, closed corporations and trusts, 80% of the net capital gain is included and taxed at the appropriate fixed corporate tax rates.
This means that the maximum effective capital gains tax rate for individuals is 18.0% (40% of the maximum marginal income tax rate of 45%), while the effective capital gains tax rate for companies and closed corporations is 22.4% (80% of the corporate income tax rate of 28%). The effective capital gains tax rate for trusts is 36.0% (80% of the income tax rate of 45%). If the capital gain of a trust is not retained in the trust but distributed to the beneficiaries of the trust, the capital gain will in most cases be taxed in the beneficiary's hands which will therefore result in a lower effective CGT percentage. Trust structures can however be quite complex and we therefore recommend discussing your tax planning structures with your accountant or tax planner.
Note: Capital losses are netted off against the capital gains that are realized during the particular income tax period but if the calculation results in a net capital loss, the loss cannot be deducted from the income that is earned from other sources. Instead, the net loss is carried over to the next tax assessment period and can be deducted from future capital gains.