Capital gains tax is a form of income tax and can be defined as the tax levied on the disposition of an asset. Capital Gains Tax has been introduced in South Africa from 1st October 2001.
Therefore, if the disposal of an asset had taken place on this date or anytime thereafter for proceeds that exceed its base cost; it would be subject to tax levied in the form of Capital Gains Tax.
SARS calculates the Capital Gains Tax in accordance with your capital losses and capital gains as reflected in your annual income tax return. It is thus of the utmost importance that your annual income tax return is reflected accurately and includes any disposition of your assets.
A resident, as defined in the Income Tax Act 58 of 1962, is subject to paying Capital Gains Tax on properties within the Republic of South Africa as well as properties registered outside of the country.
In addition, non-residents who own immovable property or who own shares within a permanent establishment within the Republic of South Africa, are subject to Capital Gains Tax.
As such, if you are not a tax resident of the Republic of South Africa and you dispose of an immovable property while making a profit as a result thereof, you will be subject to paying tax on the property sold.
Capital Gains Tax is also applicable to trusts and companies. Moreover, there is either a full or partial exemption with regards to paying Capital Gains Tax. For instance, public benefit organisations may be fully or partially exempted while full exemptions are applicable to retirement funds.
In order to understand the definition of a capital gain, one needs to understand the definition of an ‘Asset’, ‘disposal’ and the term ‘Base Cost’. An asset is regarded as a property of any nature, together with any right or interest therein.
Furthermore, we need to take into account the different forms of disposal. A disposal may be referred to as the sale of an asset, the donation of an asset, in the event of death, cessation of residence and loss or destruction of an asset.
The term ‘Base Cost’ can be described as the amount of capital used in obtaining the asset, together with the costs used to improve the valuation thereof. Such costs may include but not be limited to transfer costs, moving costs and transfer duty costs.
Capital gains and losses in relation to the disposition of a primary residence are generally excluded. However, this is limited to the amount of Two Million Rand. Therefore, a capital gain in excess of Two Million Rand will need to be made in order for Capital Gains Tax to become applicable.
On the contrary, if the proceeds of the disposal of a primary residence do not exceed the amount of Two Million Rand, then Capital Gains Tax will be disregarded, subject to certain conditions.
An instance where this rule may be expunged, is when the primary residence has been used in order to conduct business in the form of trade.
Contact our attorneys in Cape Town, for expert legal advice regarding tax law.
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