Tag Archives: Income Tax

The link between CGT and Income Tax

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CM_08_A3The name “Capital Gains Tax” (CGT) can create the impression that CGT stands on its own as a separate tax from the rest of the taxes but this is not the case. CGT forms part of the Income Tax system and capital gains and capital losses must be declared in the annual Income Tax return of a taxpayer.

If a taxpayer is not registered for Income Tax

If a natural person is not registered for Income Tax and his/her taxable income consists only of a taxable capital gain or a deductible capital loss, the amount of which is more than R30 000, the person will have to register as a taxpayer with SARS. In addition, the new taxpayer will have to submit an Income Tax return for that tax year.

If a taxpayer is already registered for Income Tax, they don’t have to register for CGT separately as CGT forms part of Income Tax.

Tax treatment of capital gains in three steps

The first step is to calculate the capital gain according to the provisions of the Income Tax Act, 58 of 1962. A discussion of the formulas to calculate the amount of capital gains and capital losses fall outside the scope of this article.

The second step is to reduce the capital gain with any exclusions which might be applicable. Please contact your tax advisor to find out if you qualify for any CGT exclusions.

Step three will be to include the taxable amount of the capital gain in the taxable income of the taxpayer. There are different inclusion rates for the following categories of taxpayers:

  • For natural persons, deceased or insolvent estates, and special trusts the taxable inclusion rate is 33,3% (increased to 40% from 1 March 2016). In other words, 33,3% of the aggregate capital gain will be added to the taxable income of the taxpayer and the taxpayer will have to pay more income tax.
  • Companies, close corporations and trusts (excluding special trusts) have a taxable inclusion rate of 66,6% (increased to 80% effective from 1 March 2016). This means that 66,6% of the aggregate capital gain will be added to the taxable income and taxed at the normal income tax rate of the taxpayer.

As a taxable capital gain will be added to the taxable income of a taxpayer, it will have an effect on certain deductions in the income tax calculation while other deductions will not be affected.

The following tax deductions for individual taxpayers will not be affected by the inclusion of a taxable capital gain in the taxable income of the taxpayer:

  • Pension fund contributions
  • Retirement annuity fund contributions

Tax deductions that will be affected by the inclusion of a taxable capital gain in an income tax calculation are the following:

  • Medical expenses (only applicable to individual taxpayers)

If a taxpayer’s medical deduction is subject to the 7,5% of taxable income-limitation, the deductible amount for medical expenses will become smaller if a taxable capital gain is included in the taxable income.

  • Section 18A donations

A taxpayer can include the taxable capital gain in taxable income before calculating the 10%-limit for the tax deduction of Section 18A donations. The allowable tax deduction of these donations will then increase by 10% of the amount of the taxable capital gain.

Tax treatment of capital losses

Capital losses may not be deducted from taxable income but must be set off against current or future capital gains. If there is insufficient capital gains to offset the full capital loss in the current tax year, the unclaimed balance of the capital loss is carried forward to the next tax year(s) until it has been fully offset against future capital gains.

As a capital gain/loss can have a material effect on a taxpayer’s liability for Income Tax, it is crucial to calculate these amounts accurately and take advantage of all the exclusions that might be applicable to the taxpayer. For further assistance regarding any aspect of capital gains/losses, please contact your tax advisor.

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This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

Selling of assets by individuals: when will it attract cgt?

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CMulder_04_A4Individuals who are residents for the purpose of the Income Tax Act, 58 of 1962, are liable for CGT (capital gains tax) on the disposal of South African and foreign assets. In addition, non-residents who dispose of immovable property in South Africa are liable for CGT as well.

As a disposal is the event that can trigger a taxpayer’s liability for CGT, it is important to know what type of transactions SARS will view as a disposal. The following actions are considered to be a disposal for CGT purposes:

  • Selling of an asset
  • Donating an asset
  • Destruction, scrapping or loss of an asset
  • Abandonment of an asset
  • Change in the use of an asset

Please note: The above actions are not a complete list of what constitutes a disposal. Please contact your tax adviser for more detailed information.

The rule of thumb is that if an asset is disposed of it will be subject to CGT, except if the capital gain/loss is specifically excluded. A capital gain/loss on any of the following disposals will not trigger CGT:

1. Disposal of a primary residence

The capital profit/loss on the disposal of a primary residence will not be taxable for CGT purposes if all the following requirements are met:

  • The proceeds are not more than R2 000 000, and
  • It is owned by a natural person (not by a company, close corporation or trust), and
  • The owner or his/her spouse normally lives in the house as their main residence, and
  • More than 50% of the house is used for private purposes.

It is also useful to know in which circumstances, upon disposal of a primary residence, a capital profit/loss, or a portion thereof, will be taxable for purposes of CGT. If any one of the following circumstances are present the capital profit/loss, or a pro rata portion thereof, will be taxable for CGT purposes:

  • If the proceeds is more than R2 000 000, the amount of the capital profit/loss exceeding R2 000 000 will be taxable.
  • When a property is bigger than 2 hectares, the portion of the capital gain/loss relating to more than the first 2 hectares, will be taxable.
  • Where a person or his/her spouse did not live in a primary residence for any period after 1 October 2001, the primary residence exclusion will not be allowed for that time period.
  • If any part of a primary residence was used for trade purposes (e.g. if you used your study to run a business from), the portion of the primary residence exclusion relating to the part of the primary residence used for business purposes will be taxable.

2. Disposal of personal use assets

The disposal of personal use assets which are owned by a natural person and not used for trade purposes, will not give rise to a liability for CGT. Some examples of personal use assets which are excluded for the purpose of calculating a potential CGT liability, are the following:

  • Personal belongings used more than 50% for personal purposes, for example a car, a caravan, an art collection or household furniture.
  • The capital gain/loss on the disposal of a boat up to a maximum length of ten metres and which was used for private/personal purposes.
  • Aircraft with an empty weight of 450 kilograms or less.

Please note: The above-mentioned circumstances is not a complete list of exclusions on the disposal of personal use assets. Please contact your tax adviser for more detailed information.

3. Disposal of an interest in a small business

The exemption of the capital gain/loss is limited to R1 800 000 if:

  • The gross asset value of the small business is less than R10 000 000, and
  • The individual is:
  • a sole proprietor or partner or has held 10% or more of the shares in the small business for five years or more, and
  • is at least 55 years old, and
  • suffers from ill-health or infirmity, or deceased.

4. Disposal of assets in a registered micro business, provided that the assets were used for business purposes

5. Receiving lump sum payments from certain approved retirement funds

6. Receiving the proceeds from certain endowment or life insurance policies

  • Second-hand policies are not excluded unless they are pure risk policies with no investment/surrender value.

7. Compensation received for personal illness or injury

8. Winnings and prizes from certain games and competitions e.g. Lotto winnings

Although the above exclusions are very specific, it is still possible to plan a transaction in such a way that will minimise the taxpayer’s liability for CGT. If you need more information on this topic, please do not hesitate to contact us for professional assistance and advice.

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This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)