Capital Gains Tax and Residential Property (The Bugle)

Capital Gains Tax (CGT) as it applies to residential property is an important consideration for buyers and sellers and could materially effect your decision regarding the registration of a property. Capital Gains Tax was introduced to South Africa and became effective as of 1 October 2001 and applies to all South African residents and foreign citizens who own fixed property in South Africa. Non-SA residents are liable for CGT when a property that is situated in South Africa is sold. If a SA resident buys a property from a foreign citizen, the onus is on the buyer to withhold CGT upon settlement (done by the transferring attorney), otherwise the buyer may be held liable for the capital gains tax. The amount of this withholding tax is calculated based on a fixed percentage of the selling price and the rate depends on the legal form of the entity that sells the property – 5% for individuals, 7,5% for companies and 10% for trusts. As a SA resident selling a property the timing of paying over the CGT is different. The relevant information would be included in the taxpayers’ income tax return in respect of the tax year in which the capital gain is realized. If a property is transferred in the March of a given year, the information will only be included when the income tax return in respect of the year ending February of the following year is completed. There can therefore be a long delay between when the sale is finalized and the date when the CGT has to be paid. The calculation of the CGT payable on a transaction depends firstly on the capital gain and then on the registration (individual, company or trust). The capital gain is the difference between the selling price of the property less transaction fees (agents commission, attorney’s fees and transfer duty) less other selling costs, less renovations or capital improvements to the property, and then finally less the cost of the property when purchased. Repairs and Maintenance expenses (such as painting) or running costs (such as municipal rates and electricity) or holding costs (such as interest paid on a mortgage bond) are not permitted by SARS to be off-set as a reduction in the profit or gain when the property is sold. Once the net gain has been calculated the CGT inclusion rate is applied to this to determine the amount that is then added as taxable income. For individuals this inclusion rate is 33,3% and for CC’s/Companies/Trusts it is 66,6%. The tax rate for CC’s and Companies is 28% and for trusts it is 40% on retained income. For these entities the effective tax rate applied to the gain is therefore 18,6% and 26,7%.  For individuals the marginal tax rate varies between 18% and 40% resulting in a max. effective tax rate on the capital gain of 13,3%. The good news is that individuals can offset the primary residence allowance of R2m from the gain before paying any CGT on the sale of their primary residence.

(Author: Andreas Wassenaar, published in The Bugle, 22 May 2013)