What is Capital Gains Tax?

When is CGT levied – with effect from the 1st October 2001, liability for CGT occurs when an affected capital assets is disposed of, for example the sale of an immovable property.  No CGT liability arises unless such a disposal occurs.

What is an affected capital asset – an affected capital asset is property of any kind, including movable and immovable, tangible or intangible assets, excluding trading stock and mining assets qualifying for an income tax deduction as capital expenditure.

Primary Residence and CGT – There is a primary residence exclusion of a gain of up to R1 000 000.

A primary residence must be a structure, including a boat, caravan or mobile home, which is used as a place of residence by a natural person.

A natural person, or special trust, must own an interest in the residence, and the natural person with an interest in the residence, beneficiary of the special trust, or spouse of that person / beneficiary must ordinarily reside in the home and must use it mainly for domestic purposes as his / her ordinary residence.

Where the primary residence, together with the land it is situated on (including unconsolidated adjacent land) is disposed of, the R1 000 000 exclusion will only apply to land:

• To the extent that it does not exceed 2 (two) hectares
• Used mainly for domestic and private purposes together with the residence, and disposed of simultaneously and to the same person as the residence.

Criteria for the Primary Residence exclusion – The exclusion of Capital Gains Tax will not apply to:

• Any capital gain in excess of R1 000 000
• Property used for domestic or private purposes, in excess of 2 (two hectares)
• Any capital gain for the period on or after the valuation date when the person was not ordinarily resident in the primary residence
• A residence held through a company, closed corporation or trust

A CC or private company is therefore not entitled to ay deduction or exemption.

Calculation of CGT or losses – Capital Gain or –loss is the consideration realized (or deemed to have been realized) upon the disposal of an affected asset/s LESS the base cost of that same asset.

Base cost – The base costs will be the sum of the valuation date value and qualifying costs incurred after the valuation date (for assets acquired before 1 October 2001).  The valuation date value, depending on the information and records available, can be determined by using anyone of the following methods:

• Market value of the asset on 1 October 2001, e.g. valuation by an estate agent.  This valuation must have been done on or before 30 September 2003.
• The time-apportionment base method
• 20% of the proceeds from the disposal

For assets acquired on or after 1 October 2001 -The base costs is the price paid for the asset, plus certain other costs incurred that are directly related to buying it, selling it or improving it.  The following can be included in the calculation of an asset's base cost:

• Acquisition costs
• Incidental acquisition and disposal costs
• Capital costs to maintain title and rights in and to an asset
• Improvement and enhancement costs
• Costs of ownership of – assets used exclusively for business purposes, listed shares and units in a unit trust scheme.

Costs that can not be added – borrowing costs, raising fees, rates and taxed, insurance and costs of repairs and maintenance.