CAPE TOWN - Capital gains tax (CGT) is not a separate tax but forms part of income tax. CGT is basically a tax on the resale of assets. Anyone who disposes of or sells fixed assets is liable for CGT. The tax also arises following the death of an asset owner.
When submitting your annual income tax return, any gains or losses based on a transaction during the tax year must be declared and submitted. “This is where the confusion can occur, and it is up to the taxpayer to prove that certain sums were of capital nature, not revenue. For instance, if a property was intentionally purchased with the aim of generating a profit, it would be considered revenue. But if the intention was a financial investment, this would be capital,” says Craig Hutchison, the chief executive of Engel & Völkers Southern Africa.
Investors need to keep records or documents that can prove why they bought an asset, to avoid revenue tax. The South African Revenue Service (Sars) is at liberty to question the objectives of an investor if there are frequent property transactions. If a homeowner keeps a property for personal long-term capital growth, Sars will see any profit on this as a capital gain.
Sars uses many tests to determine whether to implement a capital or revenue tax. For instance, if the buyer purchased a home for personal use (primary residence), this will be exempt from CGT, within certain limitations. Sars considers the first R2 million gain on the sale of a primary home as CGT-exempt. Homeowners who use part of the home for business may be liable for other taxes.
If homeowners understand the basic difference between capital and revenue gain, half the battle is won, because everyone strives to keep their tax liability to a minimum. If you are selling a property, or are intending to, it is best you read up on whether or not you need to pay CGT on the profits you make.
Here are some pointers to give you a heads up:
When did CGT come into play?
CGT was instituted in South Africa on October 1, 2001, which is considered the “valuation date”, and only gains made on a property from this date are liable for CGT. This means that, although any individual selling a property is liable for CGT, the value on which CGT will be calculated will be based on the value of the property at October 1, 2001, and the gain made from this date, up to the date of sale. Any profits accrued from this date onwards on the sale of specific capital assets will be taxed with CGT.
Who is liable to pay CGT?
Taxpayers, including individuals, trusts, companies and close corporations, will be taxed on the profit they make when they sell an asset or property. A resident, as defined in the Income Tax Act, is liable for CGT on assets located inside and outside South Africa. A non-resident is liable for CGT only on immovable property in South Africa or assets of a “permanent establishment” (branch) in South Africa. Certain indirect interests in immovable property, such as shares in a property company, are deemed to be immovable property.
Some entities, such as retirement funds, are fully exempt from CGT. Public benefit organisations may be fully or partially exempt. Normal rental income from a property is revenue, which is declared on your annual income statement and therefore not subject to CGT.
When should it be paid?
CGT becomes payable when you receive your income tax assessment (IT34). As a registered taxpayer, you will declare your capital gains and losses on your tax return for the relevant year of assessment. Keep the records necessary to determine a capital gain or loss in a safe place, because many years may pass between the date on which you acquire an asset and the date on which you dispose of it.
If you are buying South African immovable property from a non-resident seller, you must complete form NR02 and an IRP6(3) using the seller's income tax reference number and withhold the tax at the rate prescribed in section 35A(1). You may withhold at a lower rate of tax if the seller supplies you with a tax directive from Sars authorising you to withhold at a lower rate. You must submit the NR02 and IRP6(3), together with your payment, to Sars. If the seller is not registered for income tax, the NR02 and offer to purchase must be forwarded to [email protected] so that the seller can be given an income tax reference number before payment is due.
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A non-resident seller of immovable property may be entitled to request that tax be withheld at a lower or even zero rate under section 35A(2). The reasons a sale would attract a lower rate of CGT will depend on the facts of the case - for example, the person may be fully exempt from CGT, such as a foreign state, or, in the case of an individual, have a lower level of taxable income, or have disposed of the property at a loss. To request a tax directive, you must complete form NR03 and submit it, together with the offer to purchase, tax calculation and supporting documents, to [email protected], or use one of the other submission methods described on the form.
For the purposes of provisional tax, a taxable capital gain is excluded from the basic amount. If you are not permitted to use the basic amount for the purposes of your second provisional tax payment, you will have to take into account any taxable capital gain that arose, or will arise, during the year of assessment in estimating your taxable income. Likewise, a taxable capital gain must be taken into account when making any third, topping-up provisional tax payment.
The withholding tax must be paid to SARS:
- Within 14 days of the date on which the amount was withheld by a resident buyer; or
- Within 28 days of the date on which the amount was withheld by a non-resident buyer.
The above will be managed by the conveyancing attorney dealing with the transfer of the property.
It is always advisable to seek professional assistance to ensure all regulations are complied with and calculations are done accurately.
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