Not all property transactions will trigger capital gains tax (CGT), but it’s still important to know how CGT can affect your sale if you exceed the residence exclusion threshold.
In this article, we explain everything there is to know about capital gains tax in South Africa.
Capital gains tax forms part of income tax and is triggered when you make a profit from selling an asset that you own.
The amount of tax payable is calculated according to the profit you made in the sale and not the total amount you sold the asset for.
CGT applies to companies, trusts and private individuals and must be paid to the South African Revenue Service.
If you are a South African tax resident, you will be liable to pay capital gains tax on any assets located both inside and outside of South Africa.
For those who are not residents of South Africa, CGT applies only to immovable property in South Africa.
Capital gains tax in South Africa is not calculated according to a flat rate. Instead, a portion of your capital gain is added to your other income for that tax year and then you will be taxed in your tax bracket.
Your tax bracket is a result of your combined earnings for that tax year.
Therefore, CGT can range between 7.2% and 18%. This will depend on the tax bracket that you are in.
This is a relatively easy exercise. You will need to take the original purchase price of your asset, add the cost of any improvements done on the asset and then deduct that total off the selling price (after subtracting selling costs). The final number will be your capital gain amount.
Selling costs are any costs that you need to incur in order to sell the asset. For example, electrical repairs to obtain an electrical clearance certificate. Selling costs can be added to the original purchase price to determine your capital gain.
For example: you bought a house or property for R200,000, you spent R50,000 on improvements, and selling costs totalled R10,000. You then sold the property for R400,000.
200,000 + 50,000 + 10,000 = 260,000
400,000 – 260,000 = 140,000
Therefore, your capital gain would be R140,000.
If you are planning on relocating abroad and you want to sell and asset before leaving, it will be in your best interest to plan well ahead of time to ensure your tax for the year is managed in the most effective way possible.
Speaking to one of our financial advisors in Johannesburg about this can offer some much-needed clarity on the best strategy to reduce your taxable income in the most effective way possible.
You will need to establish if there will be a foreign exchange profit or loss on the original purchase price of the asset.
This can be done by calculating your capital gain in the currency you used to purchase the asset. Once you have the capital gain amount, you will need to convert it into a rand value at the current exchange rate.
Firstly, it’s important to know that whether you are a South African tax resident or not, you must pay CGT on any South African property that has been sold.
A primary residence is the place that you have lived in for most of the year – either with family or alone.
Primary residence exclusion exempts most people from being subjected to capital gains tax.
In other words, the first R2 million worth of capital gain or loss is exempt from tax. This applies only if the property you are selling has been your primary residence from the time you purchased it until such time you sell it.
If the property was not your primary residence for this period, speak to one of our financial advisors for advice on how to keep the tax man happy.
For non-South Africans who are selling a South African property, they have two options:
Generally speaking, the actual tax amount is usually less than the withholding tax amount. If you choose to pay the lesser amount, you can do so on your tax return and get a refund which may take a substantial amount of time.
For foreigners without South African bank accounts, however, this may be a challenging process.
If you are unsure about what your other options are, please speak to one of our professional financial advisors for more advice.
There are many reasons to sell your assets, especially at the current stage of economic struggles faced by South Africans. There are as many reasons to understand how capital gains tax can affect your transaction.
For more information on this, please contact us. Our financial advisors have many years of experience behind them and can help you navigate the world of CGT and other tax related issues.
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