Capital Gains Tax was introduced in South Africa on 1 October 2001, to bring the South African tax base in line with the taxation practice elsewhere in the world.
Who has to pay Capital Gains Tax
All South African residents are liable to pay capital gains tax. But foreign South African residents, who make a profit or loss when selling South African immovable property also pay capital gains tax on those gains.
What exactly does Capital Gains Tax mean for homeowners?
Taxpayers, which includes individuals, trusts, companies and close corporations, are taxed on the profit they make when they sell any asset of a capital nature (including property). Capital Gains Tax is basically a tax on the resale of all assets.
For natural persons (not trusts, companies or close corporations), there are a number of things that are exempt from capital gains tax. In most cases, capital gains tax is not payable on the profits made from the sale of a natural person's primary residence, provided the property is smaller than two hectares and the profit is less than R1 million.
But homeowners will be liable for capital gains tax on a second or third property, or holiday homes, that are not occupied as a primary residence. If a person sells any portion of their primary residence, which is used for business purposes, capitaql gains tax is also payable.
The sale of all properties registered in the name of close corporations, trusts and companies are subject to capital gains tax.
What is excluded from Capital Gains Tax?
- Your primary residence, registered in your name (a natural person)
- Your private motor vehicle, if you do not use it for business
- Proceeds from an endowment or life assurance policy
- Compensation from personal injury or loss
- Winnings from a Casino's, Lottery or Competition
What percentage of Capital Gains Tax is payable?
For legal persons (trusts, companies and close corporations), 50% of the net profit from a sale will attract capital gains tax at the marginal rate of tax. And for natural persons, 25% of the net profit from a sale will be taxed at the marginal rate of tax.
This 50%, or 25% portion of the net gain will be taxed at the marginal tax rate. For natural persons the maximum marginal tax rate is 40%, while the maximum marginal tax rate for corporate taxpayers is also 40%.
This means that corporate taxpayers pay a maximum of 15% of the net gain over to SARS as tax, while it effectively means a maximum effective rate of 10% of the profit, for a natural person such as you or I.
Capital Gains Tax And You
Capital gains tax is a reality in South Africa and it is here to stay. In my opinion, the government simply saw another place to get their pound of meat, and went for it.
South African real estate is effectively taxed twice, once through transfer duty when you buy your property, and once through capital gains tax when you sell that property for a profit.
Interestingly, there doesn't seem to be any plan to make the same international provisions in South Africa that are available to real estate investors in other international countries, whereby they are able to roll over the profits from real estate investments into other real estate investments. This works somewhat like the 4 green houses for one red hotel, in the Monopoly boardgame.
