Capital Gains Tax

Capital Gains Tax (CGT) was introduced on 1st October 2001.
A capital gain happens when you dispose of an asset at a higher price than what you paid for it.
And Capital Gains tax is a tax on that "profit".
So, it becomes vital that you know the base cost (the price you paid) for every asset that is CGT liable in order to work out the tax you owe.

CGT affects us when we dispose of assets which we own anywhere in the world - even on death.
So it is extremely important that you investigate your CGT liability as soon as possible.
Only then can you effectively plan around it.
It also affects non-South African residents who own land and buildings in South Africa.

There are three different ways to calculate the base cost of an asset acquired before 1 October 2001 (the effective date).

The time apportionment method - you work out what proportion of the time you have owned the property after CGT was introduced and apportion the total gain you have made in terms of this;

The 20 percent of proceeds method - you simply assume that the value of the property on October 1 2001 was only 20 percent of what it is when you sell or dispose of it. (You would use this if you did not know what you spent on the property before October 1 2001.); and

The market value method - you had your house valued as at October 1 2001 (before the 30 September 2004 deadline).

Obviously, you want to use the method that provides you with the highest base cost and, with most assets, you have the choice to use any of the methods above.

The onus of proof of the base cost is your responsibility.
If you use the re valuation method when you sell the property, it is important to remember that the onus will be on you to demonstrate that the valuation is correct, if the South African Revenue Service (SARS) decides to query your valuation.

Your Home as Primary Residence.

If your only fixed property is your primary residence, then the re valuation method will depend on two things. The first is whether you believe you will remain in the property until it is sold, bearing in mind that if it is used for any purpose other than as your primary residence before it is sold, CGT may become more of an issue than you thought.

The second factor is your view on what will happen to the value of your property by the time you sell (or die - remember CGT is triggered on the value on death).

The reason for this is that if the property is your primary residence, there is an exemption from CGT on the first R2 million of capital gain made on that property.
That is, if the value of your home has not increased by more than R2 million by the time you sell it, you won't pay any CGT.

However, if you look at the prices of properties over the past 5 years, you may think again about assuming that your current home, worth say R500 000, will never increase to more than R1million.

Only property held before 1 October 2001 needs to be valued.
There is no need to value properties acquired after that date, because the base cost of properties acquired after 1 October 2001 is the cost of acquiring the property.

The valuation must be submitted to SARS with your tax return for the tax year during which the asset was disposed of. The tax authorities have issued a valuation form, which must be attached to the tax return.

But, your CGT liability may also extend to your business!

You should identify all the assets that you own, including intangible assets such as goodwill that may have been overlooked. Especially if your goodwill exceeds R1m.

Note too that the R1m exemption from CGT on the sale of a primary residence might be negatively affected if part of the residence is used for business purposes.

Be aware your home business is liable for CGT if;

You claim a tax rebate for home office use;
Your property is larger than two hectares regardless of whether it is a primary or secondary property; and
If the property is owned by a company, CC or trust.

Property owners who let cottages for extra income are also subject to CGT.