Understanding Capital Gains Tax

The South African Revenue Service (SARS) taxes capital gains through the Capital Gains Tax (CGT) system. The CGT rate for companies is 21.6%, which can have significant implications for buying and selling assets.

In this article, we'll discuss CGT, who is required to pay it, which assets are affected, and the various costs that contribute to their value.

What is CGT?

Capital Gains Tax (CGT) isn't a separate tax but is part of income tax, usually taxed at a lower rate than regular income. It's a tax on the profit made from selling assets. Anyone who sells their fixed assets or inherits assets after the owner's death is subject to CGT.

CGT is taxed at a lower rate compared to regular income. Only capital gains and losses occurring after October 1, 2001, are considered. Not all assets are subject to CGT, and some capital gains and losses are disregarded.

For non-resident sellers of immovable property, there's a withholding tax (section 35A). The buyer withholds an amount, acting as an advance payment towards the seller's final income tax liability.

Which assets are affected by CGT?
In practice, Capital Gains Tax (CGT) applies to profits of the following:

• Selling shares of a company, whether directly or indirectly through ownership of units in a unit trust or exchange-traded fund
• The sale of a small business
• Selling bullion coins
• Money exchanges, including cryptocurrencies

CGT exclusions

There are certain exclusions where Capital Gains Tax (CGT) does not apply. Among them are:

• Personal belongings which include most personal items like motor vehicles, furniture, and appliances are excluded. 
• Capital gains and losses made on the sale of a primary residence are partially or fully disregarded under certain conditions.
• Lump sum withdrawals from pension funds, provident funds, and retirement annuity funds are excluded.
• Proceeds from tax-free savings accounts are exempt from CGT.
• Payouts from life insurance or endowment policies are excluded, provided they are not second-hand or foreign policies.
• Gains from prizes, and compensation for injuries or illness.

Rollovers: CGT may be deferred or rolled over to a later date in certain instances, such as when leaving property to a spouse or replacing assets destroyed or disposed of involuntarily due to law operation.

Annual exclusion

• Each year, individuals can have net capital gains of up to R40,000 without facing tax obligations. 
• Moreover, in the year of an individual's passing, they are assumed to have disposed of all their assets for CGT purposes on the day of their death. During that tax year, the capital gains tax exclusion amounts to R300,000.

Calculating the cost of assets

Calculating the original cost of a commercial property for Capital Gains Tax (CGT) involves adding up various expenses. Start with the initial purchase price, include any fees incurred during acquisition, factor in expenditures on property improvements, and account for expenses related to its sale. Understanding these cumulative costs is crucial for property owners when selling commercial or industrial properties and complying with CGT regulations.

Who's liable to pay?

Taxpayers, including individuals, trusts, companies, and close corporations, are taxed on the profit they earn from selling an asset or property. According to the Income Tax Act 58 of 1962, you're liable for Capital Gains Tax (CGT) on assets if you're considered a resident.

Capital Gains Tax (CGT) regulations also apply to commercial and industrial properties, including factories, warehouses, and manufacturing facilities, for both residents and non-residents. Moreover, assets of a "permanent establishment" (branch) in South Africa, which may include industrial properties used for business operations, are also liable for CGT.

Commercial and industrial property rates

The tax rates vary: individuals are taxed on 40% of the capital gain, while businesses and trusts face a higher rate of 80%. As of February 2023, the applicable tax rate is 18% for individuals, 21.6% for companies, and 36% for trusts.

While primary residences enjoy exemptions, commercial and industrial properties do not receive the same treatment. However, individuals selling commercial properties can benefit from an annual exclusion of R40,000, and small business owners may qualify for a special concession under specific conditions.

If you need help finding industrial properties or selling property, Newpoint Properties is here to help. You can browse our property listings or get in touch with our property practitioners today.