When you fill in your tax return this year, it will be the first time you need to declare any capital gains or losses you have made. Capital gains tax (CGT) came into effect on October 1 2001, so you need to consider any assets you sold after that date in order to determine whether or not you made a taxable gain or loss. With the help of the South African Revenue Service (SARS), we have compiled some guidelines to help you establish what you need to declare and what you will be liable for.
WHAT YOU SHOULD KNOW ABOUT CGT
What is CGT?
CGT is a tax you pay on the profits you make on your assets. You only become liable for CGT when you sell or otherwise dispose of your assets. It is important to remember that you will only pay tax on the profit you make, not on the proceeds from the sale. This means you can deduct the cost (base cost) of the asset from the amount you realise on the sale of the asset. (See What is the base cost of an asst held before October 1 2001.) Then, if you had the asset before CGT was implemented on October 1, 2001, you must also exclude the profit that accumulated until then. Lastly, remember that as an individual, you will only pay tax on a quarter of this gain.
What assets are excluded from CGT?
The gains you make on certain assets are excluded from CGT. Some important exclusions are:
- The gain or loss you make on your primary residence, unless that gain or loss is more than R1 million;
- The gains or losses you make on most of your personal belongings and effects, such as motor vehicles, furniture, collectibles, etc, with the exclusion of gold and platinum coins;-
- The proceeds from an endowment policy or life assurance policy (the exception to this is a second-hand policy, which is subject to CGT);
- Your retirement savings - while the government
reviews the taxation of retirement savings, there is a
three-year moratorium on CGT on lump sums paid out
from pension, provident and preservation funds as well as retirement annuities;
- Any compensation you receive for personal injury or illness;
- Prizes or winnings from any South African competition such as the National Lottery;
- The loss or gain you make on any foreign currency you obtained for your personal use on a trip abroad and that you did not spend and have brought back home with you to convert back into rands; and
- The proceeds of the disposal of small-business assets, under R5 million, where such proceeds will be used for your retirement. The small business owner must be over the age of 55, or retiring due to ill-health or infirmity, and he or she must have held at least a 10 percent share of the business for five years. This exemption is also limited to a gain of R500 000 in your lifetime.-
What is meant by primary residence?
Your primary residence is the home you, as an individual, own and use as your private residence. If you use a portion of the residence for business purposes, this portion will not form part of your primary residence and any gains or losses made on this portion must be declared for CGT purposes. For example: You use 10 percent of your home for business purposes and claim 10 percent of the expenses you incur in running your home against your income as a deduction. When you sell your home, only 90 percent of the gain you make is exempt from CGT on the grounds that it is your primary residence.
What happens if you transfer property to your spouse?
If you transfer property to your spouse, you won't be liable for CGT on the disposal of this property. This transaction is referred to as a rollover of assets and your CGT liability is deferred until your spouse disposes of the asset. The base cost you had for the asset is rolled over to your spouse. This also applies to the transfer of property as a result of a divorce order or a donation, and the transfer of property
from a deceased estate to an heir. If the disposal of your property is involuntary - for example, if your house burnt down, was expropriated or sold in execution - you can also apply the rollover rule, as long as you replace the asset within three years.
What happens if you do not live in your home?
In four cases you will be treated as still being resident in your home for a continuous period of up to two years, even though you have moved out. These cases are:
- If your old home is in the process of being sold, while you acquire a new primary residence;
- If your home is in the process of being built on land you acquired for the purpose of using it as your primary residence;
- If your primary residence has been accidentally rendered uninhabitable; and
- If you die.
What is the base cost?
On any assets purchased after October 1 2001, the base cost of an asset is generally what you actually spent on acquiring an asset, together with expenditure directly related to the acquisition or disposal of that asset. It also includes any costs you incurred in improving the asset, so long as those improvements still exist when you dispose of the asset and you haven't claimed these expenses against your income tax. Some of the main costs that may form part of the base cost of an asset are:
- The original cost of acquisition;
- Transfer costs, stamp duty, and VAT paid, and not claimed or refunded on the asset;
- Advertising costs to find a buyer or seller;
- The cost of improvements to an asset;
- The cost of the valuation of the asset for purposes of determining a capital gain or loss;
- The costs directly related to the acquisition, creation or disposal of that asset - for example professional fees paid to a surveyor, broker, agent, consultant, etc for services rendered;
- The cost of establishing, maintaining or defending a legal title or right in the asset;
- The cost of moving the asset from one location to another; and
- The cost of the installation of the asset, including the cost of foundations and supporting structures.-
The base cost of assets purchased before October 1, 2001 is the value of the asset as at October 1, 2001.
What is the annual exclusion?
Each year the first R10 000 you realise on the sale of assets will be exempt from tax for CGT purposes. This is referred to as the annual exclusion and it also applies to losses. In other words, if you make a loss of less than R10 000, it will also be excluded for CGT purposes. In the year in which you die, your annual exclusion increases to R50 000, which means your estate can dispose of your assets without incurring CGT, unless there is a gain or loss of more than R50 000.
What is the inclusion rate?
When you calculate the tax you owe, as an individual, you only need to include 25 percent of the net gain. However, when you are completing your tax return, you must declare the full amount of the gain or loss you have made, as the annual exclusion and the inclusion rate will be calculated by SARS. It is because of this inclusion rate, that the effective rate of CGT is in fact lower than your income tax rate. For example, if your marginal tax rate is 40 percent and you add only a quarter of any capital gain to your taxable income where it will be taxed at 40 percent, the effective rate of the CGT you pay is 10 percent.
HOW TO DETERMINE YOUR TAXABLE CAPITAL GAINS
How are capital gains and losses calculated
The gain you have made is the amount by which the proceeds exceed the base cost of the asset. A capital loss is equal to the amount by which the base cost of the asset exceeds the proceeds.
What's the base cost of an asset held before October 2001
Because CGT only applies to gains made after October 1, 2001, you can exclude any gains made before then. There are three ways to do this:
- You can use the market value of the asset as at October 1, 2001. In order to determine the market value, you can make use of various options. For example, with property, you can make use of a professional valuer or a knowledgeable person, or you can collect advertisements of property sales of similar properties. However, you should be aware that SARS can question your valuation, and if you cannot prove it, the value may be adjusted. The valuation of property must be done before September 30, 2003 and must be done as at October 1, 2001 (the valuation date). If you don't want to bother with this method, you can use one of the two other methods;
- You can deem 20 percent of the proceeds of the disposal of the asset to be the base cost as at October 1, 2001. This method is useful if you don't have any records indicating what you paid for the asset originally; or
- You can use the time apportionment method. Determine the period between the valuation date (October 1, 2001) and the date you disposed of the asset. (For the purposes of this calculation a part year will be considered a full year.) Then multiply this annual gain by the number of years you have owned the asset before October 1, 2001 and divide the answer by the total number of years you held the asset. The result of this calculation must be added to the original cost of the asset to derive the base cost. The calculation must be according to the formula below.
ORIGINAL COST + (GAIN X (PERIOD HELD BEFORE VALUATION DATE / PERIOD HELD BEFORE AND AFTER VALUATION DATE))
How CGT will affect your listed shares
Shares pay dividends and also show capital growth. Dividends are regarded as income and are not subject to CGT. But any growth in the value of your shares after October 1, 2001 will be subject to CGT and you will become liable for this when you sell or dispose of your shares. The base cost of shares bought before October 1, 2001 will be the price that you paid for them. The base cost of shares bought before October 1, 2001 can be determined by making use of one of three different options:
- Average price on October 1, 2001
The base value of shares listed on the JSE Securities Exchange is the weighted average closing price for the last five trading days before October 1, 2001. You will find these prices on the SARS website.
To determine the cost of foreign securities not listed on the JSE, you have to obtain the last selling price quoted on the relevant foreign exchange on the last trading day before October 1, 2001. Use the exchange rate of that day to convert the base cost to rands. Use the exchange rate on the day you sell or dispose of your foreign securities to convert the proceeds to rands. You can obtain these rates from the foreign exchange department of your bank or from the ecommerce section of the SARS website, www.sars.gov.za
- The proportional calculation
If you bought a share before October 1, 2001 and sold it after this date, work out the capital gain over the full period, and divide this by the number of years you have owned the shares. Then take the amount of this annual gain and multiply it by the number of years you have owned the share since October 1, 2001. For this calculation, count part years as full years.
Neither of these calculations applies if you have made a real loss on your shares - in others words, you have sold them for less than what you paid for them. For example, if you paid R100 for shares and sell them for R80, you have made a real loss of R20. But if the base cost on October 1, 2001 was R70 you would have made a phantom gain of R10. To avoid this, in all cases where you have made a real loss, you will be covered by the limitation of loss rule, and the capital gain or loss you made since October 1, 2001 will be set at nil.
- The 20 percent calculation
If you have no records of the original price of the share, you can declare 20 percent of the proceeds of the disposal as the base cost.
How CGT will affect your unit trusts
You will pay CGT on unit trust funds and property unit trusts, but only when you sell them or switch between funds. Your unit trust management company will inform you every year what capital gains or losses you have made on the unit trusts you have traded.
The figures you get from your unit trust company will be based on the weighted average values. If you prefer, you can use other methods, but you will be responsible for the collection of data, such as the base cost of your units and the repurchase price, and the calculations. If you have bought and/or sold units in the same fund at different times, you can then decide in what order you sold your unit trusts. You could, for example, use what is called the first in, first out (FIFO) method. This means selling the units you bought in the order you bought them, subtracting the price you paid for each set of units from the price you receive from each sale until all the units have been accounted for.
If you want to work out what tax you are liable for before selling your units, work out the difference between what you will be able to cash your units in for and, if you bought them after October 1, 2001, what you paid for your units, or, if you bought them before October 1, the base value for those units on October 1. A list of these unit trust base values is available on the SARS website. Take the published value and multiply it by the number of units you plan to sell to find out the value as at October 1, 2001. If you have invested in a foreign mutual (unit trust) fund using your R750 000 offshore allowance, the value of those units on October 1, 2001 is the last published price at which a unit sold before that date. You will need a letter from the mutual fund manager confirming the price at the end of trading on Friday, September 28, 2001.
All capital gain or loss calculations for a mutual fund are done in rands. You need to use the ruling exchange rate on the day of purchase or sale, even though you may not be transferring the assets back to South Africa.
Many foreign unit trust funds do not declare either a dividend or interest but use the money that comes into the fund to issue you with further units. The extra units you receive will be regarded as a capital gain and will be subject to CGT when you sell the units.
If you re-invest, or buy extra units, with interest payments from your fund on which you have already paid income tax, these units will have their own base costs determined by the price you paid for them.
How to declare capital gains in your tax return
Example
Supposing you bought a second property for R100 000 in May 2000. On October 1, 2001 your property was worth R120 000. On February 28, 2002 you sold your property for R140 000. Your gain would be:
R140 000 - R120 000 = R20 000.
Turn to the schedule in part 7 of your tax return. Fill in the R140 000 under proceeds. Fill in R120 000 under the column headed base cost. Your capital gain is R20 000. Fill this in in the column headed capital gain. Look up the code for your gain or loss in the information brochure - for example, 6502 is the code for fixed or immovable assets.
Fill in the details for each capital gain or loss you made, and total these up. Subtract the losses from the gains. Do not apply the exemption or the inclusion rate. SARS will do these calculations for you. Transfer the net gain or loss to part 3.4.2, where SARS will work out the taxable amount. (In the example above, SARS will subtract the R10 000 annual exclusion from your R20 000 gain, leaving R10 000 and will then add only 25 percent of this, or R2 500, to your taxable income.)
Remember that capital losses cannot be used to reduce your taxable income. You can only use capital losses to reduce capital gains. If you do not have a gain to offset your loss against, then apply the annual exemption. In other words, disregard the first R10 000 of any loss. If you have made a loss in excess of this, the excess amount will be carried forward to future tax years to be offset against another capital gain.
If you are married in community of property, carry 50 percent of the gain or loss over to part 3.4.2.
If you have made both local and foreign gains and/or losses, make a copy of the schedule in part 7.1, fill in the details of of your local gains/losses on the original and the your foreign gains/losses on the copy, or vice versa and attach the second schedule to your return.
In part 7.2 (only on the IT12BU form) you are asked to indicate whether a valuation certificate as required in terms of the Income Tax Act has been attached. You need to attach a valuation certificate if you have used the market valuation method to determine the base cost of your asset.
See also: