There are many situations in which applying a tax on the gain you make after October 1 is not as straightforward as it seems.
Question:
You will pay capital gains tax (CGT) on the gain you make on your share investments, but Robert van der Valk would like to know how shares would be taxed if he had in fact made a loss on them. He gives the following example: "I bought shares in 1999 for R100 each. The average price at the starting date for CGT (October 1 2001) is R60. I then sell these shares at a date after October 1, 2001 for R70. Am I now liable for CGT on the R10 being the difference between the realised price and the valuation date value, when in fact I made an actual loss of R30 per share?"
Answer:
SARS says the answer to this question is no. SARS says paragraph 27(2) of the Eighth Schedule provides that your valuation date value will be restated to R70 under these circumstances. There will, therefore, be no capital gain or loss on this transaction. A similar principal applies where an asset is sold for less than its market value but more than its historical acquisition cost.
Question:
Shikar Partab wants to know what is exempt from capital gains tax.
Answer:
SARS says the exclusions from gains tax are contained in Part VII (Primary Residence Exclusion) and Part VIII (Other Exclusions) of the Eighth Schedule.
A brief list of the most important exclusions are:
* Primary residence up to R1 million and two hectares;
* Personal use assets, but not gold or platinum coins, immovable property, aircraft heavier than 450kg, boats longer than 10m, certain interests that reduce in value over time, and rights or interests in any of the listed assets;
* Lump sum retirement benefits;
* Long-term assurance (only domestic policies in the hands of the original owners or nominees of the original owners who have not paid for the cession of the policy);
* Disposal of small business assets on retirement, up to R500 000;
* Compensation for personal injury, illness or defamation;
* Authorised domestic gambling, games, and competitions;
* Disposals by a unit trust, but not by a unit holder;
* Donations and bequests to public benefit organisations; and
* Disposals by exempt institutions and public benefit organisations.
Finally, an individual's total capital gain or loss for a year is reduced by an additional annual exclusion of R10 000. This exclusion increases to R50 000 in the year the individual passes away.
Question:
Shikar Partab also asks if a salaried employee sells a second house he or she owns and has been letting out, if the employee will be liable for gains tax. Further, Partab wants to know what would be the case if the taxpayer gave the tenant notice on the second property, moved in and lived in the property for a while before selling. Is there a period that a person must live in a property for it to be classified as his permanent residence, he asks.
Answer:
SARS says that in both cases the taxpayer would be liable for gains tax. In the second situation, the taxpayer would be liable for capital gains tax in respect of that period that he let out the residence.
Assume the individual let out the property from October 1 2001 to September 30 2002, and then lived in the residence for another two years before selling it. He will be liable for capital gains tax in respect of one third of the capital gain on the disposal of the property.
There is no minimum period that an individual must live in a residence to claim it as his or her primary residence. However, that individual must be able to convince SARS that the residence is his or her ordinary residence. A word of warning: an individual who buys and sells properties at short intervals runs the risk of being classified as a trader, in which case any profits will be taxed in full.
Question:
A Personal Finance reader says he purchased his house by taking over a trust. He and his wife became the new trustees and beneficiaries while the sellers resigned as trustees/beneficiaries. He organised the bond, in the name of the trust, and paid all affiliated costs in making the purchase.
He wants to know if this fulfils the requirement for exemption from transfer duty that states "Ethe individual must have originally E financed all the expenditure actually incurred by the trust to acquire and to improve the residence."
"Even if I do qualify for exemption from the transfer duties, were I to transfer the house into my name I'm sure there will be some costs. What can I expect? Legal fees? Bond registration costs? It sounds too good to be true."
Answer:
SARS says the reader appears to have become involved in a scheme that purports to avoid transfer duty.
SARS does not accept the validity of these schemes and is currently working on a test case in this regard.
The reader does not meet the requirements to qualify for the exemption, as he is not the original financier of the expenditure incurred by the trust to acquire the property.
Another exemption is to be found in section 9(4)(b) of the Transfer Duty Act.
This section provides for a transfer duty exemption where a trust is founded by a natural person for the benefit of a relative and the property is transferred to the relative.
In this case, however, the exemption will not apply as the trust was not founded for a relative of the reader.
Finally, had the reader qualified for the exemption from transfer duty on the transfer of the property and from stamp duty on the hypothecation of the mortgage bond, he would still have been liable for conveyancer's fees, bank charges and other non-tax costs of the transfer.
If there are capital gains tax issues you are unsure of, send your questions to us and we will publish the replies from the South African Revenue Service (SARS) in this column.
Send your questions to Personal Finance, PO Box 56, Cape Town, 8000, or fax (021) 488 4119, or e-mail [email protected]