While capital gains tax (CGT) won't pertain to every property transaction, it is vital that those looking to sell their property understand the implications that it may have for their property sale transactions, says Adrian Goslett, chief executive of RE/MAX of Southern Africa.
"Capital gains tax forms part of a continuing reform programme that was introduced in South Africa in October 2001. Essentially it is the tax that is payable by a seller on any profit made from the sale of a fixed property or any capital sale of assets globally. While the tax applies to all individual South African resident taxpayers as well as companies, close corporations and trusts, foreign investors are not exempt. Any non-South African resident taxpayer who sells an immovable property in South Africa will be liable to pay the applicable CGT on that transaction," says Goslett
He notes while CGT was only introduced in South Africa in 2001, internationally CGT was implemented a few decades ago in many of the countries that South Africa trades with. Although many capital gains or losses on the disposal of an asset are subject to CGT, there are some cases where transactions are excluded due to specific provisions. These provisions can be found in the Eight Schedule to the Income Tax Act, 1962 (the act), which determines a taxable capital gain or assessed capital loss.
With regard to the sale of a primary residence, Goslett says the large 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.
He notes that in terms of the act, a primary residence is defined as a property which is owned by a natural person. The owner or their spouse must ordinarily reside in the property as their main residence it must predominantly be used for domestic purposes. In cases where the property has been used for business purposes, the exemption will be apportioned for those periods where the property is not used as a primary residence.
According to Goslett, 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, provided the following circumstances apply: 1)The primary residence has been accidentally rendered uninhabitable. 2) 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. 3) The property was being built on land acquired for the purpose of erecting a primary residence.
"Before March 1, 2012, the primary residence exclusion was R1.5m. However, since the budget speech in 2012 the exemption on a primary residence has been changed to R2m. It is important to remember that this is based on the capital gain made on the sale and not the purchase price of the property, so there are a number of expenses that will need to be deducted to determine whether CGT is applicable," says Goslett.
He notes that for a seller to determine the capital gain made in a transaction they will need to deduct the amount that property sold for from the base cost of the property. The base cost is determined by combining the original price the seller paid for the home along with all costs incurred during the buying and selling of the property. These costs would include expenditure to acquire the property, transfer costs and duties, attorneys fees, agent's commission and other services rendered. These costs can include renovations which qualify as improvements, routine maintenance costs may not be included.
Once this base cost of the property has been determined. it is then possible for Sars to calculate the CGT to be paid based on the net profit realized. Goslett says that 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 when the individual's income tax return is submitted at the end of the financial year during which the property was sold. - Saturday Star 07/09/13