While a large number of property transactions may not cause you to have to pay capital gains tax, understanding how it can affect your sale should you exceed the residence exclusion threshold is beneficial. Here’s what you need to know.
What is capital gains tax?
Capital gains tax (CGT) is part of income tax. It is triggered when you make a profit from selling something you own (an asset). The tax is calculated on the profit you make and not the amount you sold it for.
CGT applies to individuals, trusts and companies and must be paid to the South African Revenue Service (SARS). If you are a South African tax resident, you are liable for CGT on assets located in and outside South Africa. Non-residents are generally only liable for CGT on immovable property in South Africa.
How much is the tax rate?
In South Africa, CGT is not a flat rate. A portion of your capital gain gets added to your other income for that tax year and you’re taxed in your tax bracket (your combined earnings for that tax year are taxed). The CGT rate can range from 7.2% to 18% depending on the tax bracket you’re in.
Working out your capital gain
To work out your capital gain, you need to take the original purchase price of your asset, add any improvements or capital expenditure and then take that amount off the selling price (after deducting selling costs). The final value will give you your capital gain amount.
For example: If you purchased a property for R100,000 and spent R50,000 on improvements and then sold the property for R200,000, your capital gain would be R50,000.
Selling costs can include any costs that you need to incur to be able to sell the property. These can be electrical fixes to obtain and electrical clearance or specific changes required by the Purchaser. This amount can be added to the original purchase price when determining your capital gain.
What to do if you are leaving South Africa and disposing of an asset
If you are planning on disposing of an asset before relocating abroad, it’s best to plan ahead to ensure your tax for the year is managed effectively. You should first look at your other South African-based income to see if it can be streamlined by either breaking it up over multiple periods or reducing your earnings in South Africa (if you can) for that tax year.
What to do if you’re a South African tax resident disposing of a foreign asset
You’ll need to ensure if there is a foreign exchange profit or loss on the original price of the asset. To do this, you will need to calculate your capital gain in the foreign currency and then convert the amount at the current exchange rate.
For example: John buys an asset for £1,000 and sells it three years later for £5,000. To determine the gain in Rands, John takes the difference in the purchase and selling price, which is £4,000, and converts that value into Rands.
CGT on South African property: How does it work?
If you are a South African tax resident or not a South African tax resident, you must pay tax in South Africa on any South African property sold.
Selling your primary residence
Your primary residence is defined as the place you reside in for most of the year either alone or with your family.
Most people will not be subjected to CGT on their primary homes because of the primary residence exclusion. This means the first R2 million capital gain or loss is exempt from tax only if the property you’re selling has been your primary residence from the time you purchased the property to the time you sell it. If the property was not your primary residence for this entire period, it’s best that you get advice and assistance from a tax specialist on how to sell your property and remain tax compliant and so you can work out the correct tax payable.
If you are a non-South African tax resident selling a South African property
Non-South African residents can either pay withholding tax, which is 7.5% of the total selling price, or the actual tax amount. Generally, the actual tax amount is less than the withholding tax. If you want to pay the lesser tax amount, you can do it on your tax return and get a refund, which can be 7 or more months later. However, this option can be problematic for foreigners who don’t have a South African bank account because it means that they have to be paid directly offshore and this can be a painful process.
The best option is to ask for a tax directive upfront. A tax directive is an official instruction from SARS to deduct tax at a set amount. However, this process can take up to 21 working days, and your attorney has to pay SARS within 10 working days from the date of the transfer, which can leave you scrambling to get your tax paid in time.
If you decide to take this route it has to be done before the transfer takes place – something not many attorneys are aware of.
SARS’s system isn’t always perfect, which is why it’s a good idea to get help from a tax expert. For example, SARS has on occasion incorrectly assumed that when a property is sold for under R2 million, it is the seller’s primary residence and deducts the R2 million rebate automatically. This will be incorrect if the property is not your primary residence. Should this happen and you are unaware, you could face penalties further down the line.
When do you need to pay CGT?
You will need to pay CGT when you receive your income tax assessment. You will be required to declare your capital gains and losses for that year of assessment.
Keep your records in a safe place – it could be years between the time you obtained an asset and when you dispose of it.
A tax expert can ensure you stay on the right side of the tax man
While some people opt to have their attorney deal with their tax affairs when selling a property, an attorney won’t necessarily know what can be deducted for tax purposes. Some may not know how to do a correct application with SARS and should they give you incorrect advice, you will not be able to sue them because they are not a registered professional who can give you tax advice.
A good capital gains tax specialist accountant has a thorough understanding of tax laws and can give the correct and up to date advice on all your tax matters. This is particularly important should your circumstances be complicated, or if SARS implements any new rules or regulations.
Our tax experts can advise on all South African tax matters and structure the best solution for you. Get in touch with us on +27 (0) 21 657 1517 or at firstname.lastname@example.org.
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