This Information supplied by the South African Revenue Services and Compiled by Bizland.

1. What is Capital Gains Tax?

Capital Gains Tax is the tax that you pay on any profits you make on your assets when you sell or dispose of your assets in any way. You will therefore not pay Capital Gains Tax on the full amount of the sale, but only on the profits. Profits accumulated before the date when capital gains came into effect are excluded.

2. Why is Capital Gains Tax being introduced?

The absence of Capital Gains Tax (CGT) creates many distortions in the economy, by encouraging taxpayers to convert otherwise taxable income into tax-free capital gains. SARS has noticed that clever taxpayers have made use of these conversion transactions, which has eroded the corporate and individual income tax basis, reducing the efficiency and equity of the overall tax system. CGT therefore protects the integrity of the personal and corporate income tax basis and can materially assist in improving tax morality.

3. When does Capital Gains Tax come into effect?

CGT came into effect on Monday 1 October 2001. Only gains made after this date will be taxed, therefore it is important to know the value of an asset on this date.

4. Who is liable to pay Capital Gains Tax?

Resident individuals, companies, close corporations and trusts will be subject to capital gains tax on the disposal of any local or worldwide assets. Emigration is deemed to give rise to a disposal of assets. For resident individuals, certain private use assets are exempt from Capital Gains Tax (e.g. motor car, clothing, etc.).

CGT also applies to non-residents in respect of local immoveable property (or interests therein) or assets of a local permanent business establishment (e.g. a branch office).

5. What are affected capital assets?

Affected capital assets are any kind of property, be it movable or immovable, tangible or intangible, for example land, mineral rights, office blocks, plant and machinery, motor vehicles, boats, caravans, trademarks, shares, etc. Affected capital assets exclude trading stock and mining assets that qualify for an income tax deduction as capital expenditure.

6. What is the base cost of an affected capital asset?

The base cost of an asset it basically what you spend on attaining the asset as well as any other expenditure directly related to this or the disposal of the asset. It also includes any costs you encounter on improving the asset, provided that you haven’t claimed these costs against your income tax and that these improvements are still there when you dispose of the asset.

Base costs of an affected capital asset therefore may include:

  • The original cost of actually acquiring the asset.
  • Any incidental costs related to the acquisition or disposal.
  • Any costs incurred through maintaining title or rights to the asset.
  • The cost of improving on the asset.
  • VAT paid and not claimed or refunded.

Note: Current costs such as interest, repairs, insurance, rates and taxes may not form part of the base cost – these costs would normally be on revenue account, rather than being capitalised.

7. What is the inclusion rate?

Individual only need to pay CGT on 25% of the net gain, while companies, close corporations and trusts need to pay on 50%

8. What assets are exempt from CGT?

  • Your primary residence (i.e. the home that an individual/spouse or special trust owns and usually lives in) unless you make a gain or loss on it of more than R1 million
  • All private motor vehicles used for personal use, not business purposes
  • Personal belongings and effects, such as jewellery and collectibles, but excludes boats, caravans, aircraft, share certificates and gold or silver coins (such as Kruger Rands)
  • Any proceeds from a life insurance or endowment policy (except for a second-hand policy)
  • Any compensation you receive for personal injury, illness or defamation actions
  • Prizes or winnings you receive from lotteries, betting or competitions, provided you are not a professional gambler
  • Foreign exchange gain or loss on currency you exchange back into Rands having used it for your personal use for a trip overseas
  • Small-business assets that you dispose of, where the proceeds will be used for your retirement, provided that you are over the age of 55 or you retire due to ill health
  • Any institution fully exempt from normal taxation, such as government departments, local authorities and approved public benefit organisations

9. When is Capital Gains Tax triggered?

CGT is triggered when a disposal has taken place – i.e. when there is a change of ownership when the asset is either: