SOME USEFUL INFORMATION ON
CAPITAL GAINS TAX

Capital Gains tax will be effective from 1 October 2001, and there are still many uncertainties about this subject. Some of you might have had the opportunity to study this new legislation extensively, in which instance this document might not be of much use. However, every homeowner will be confronted with Capital Gains Tax at some time - and there are still many agents and proposed clients that have not had the time to familiarise themselves with this subject. I have therefor thought it appropriate to
provide some essential and simplified information that might be useful in the weeks to come.

Firstly, some general information about Capital Gains Tax

Clients will pay Capital Gains Tax [CGT] on the proceeds of all properties that are sold for a gain. A R1,000,000 concession will be granted on a gain made in the sale of a primary residential property - this will be a property owned by an individual [or special trust], used mainly for domestic purposes. This concession is per residence, and is only applicable to properties smaller than 2 hectares [ any portion of the property in excess of this will qualify for CGT]. A person can only qualify for one residential property at a time. Where properties are also used for business purposes, the area of the property not used for residential purposes will be apportioned and included appropriately.

As companies, trusts and closed corporations do not qualify for this concession, a time period was provided in which to transfer properties from these entities to natural persons, while qualifying for a transfer duty exemption, subject to certain requirements being met:

For companies and closed corporations, the requirements are as follows:

• The property must be used mainly as primary residence.
  
  
• The acquisition must take place before 30 September 2002
  
  
• The new owner must have resided in the property from 5 April 2001 to date of registration.
  
  
• The owner and his/her spouse, must have been the only shareholder [or member] of the company [CC] since 5 April 2001 to date of registration.

For trusts, the requirements are the same as mentioned in the first three points above and:

• Registration of the transfer must take place no later than 31 March 2003.
  
  
• The person acquiring the property must have donated the property [or made any other settlement or disposition] to the trust, and must have carried all the costs to acquire and improve the residence.

How is the capital gain calculated?

[1] The base cost of the property is deducted from the selling price. [2] Thereafter the R1.000,000 concession is deducted, which amounts to the capital gain/loss. [3] The nett amount is then multiplied with the appropriate percentages [ noted below] and included in the entity's taxable income. [4] CGT rebates are then taken into account [Clients qualify for an additional rebate of R10,000 p.a. on the average capital gain, and the case of a client's death in the appropriate tax year, a rebate of R50,000 will be granted.]

The amount of capital gains tax that is to be included in the taxable income of the applicable owner, are determined as follows:

• For natural persons 25% of the gains are to be included in the taxable income of the person, then taxed at the marginal tax rate.
  
  
• For Trusts, CC's and Companies, 50% of the gain are to be included in the taxable income of the entity, and then taxed at the appropriate tax rate.

Example: Ms Hobble sells her home for R1,800,000 on 1 December 2005, after acquiring it for R600,000 on 1 December 2001. Additional expenses
that may be added to the base cost amount to R100,000

1. Base cost minus selling price:
   R1,800,000 - [R600,000 + R100,000] = R1,100,000
   
   
2. Deduct R1,000,000 concession:
   R1,100,000 - R1,000,000 = R100,000
   
   
3. As this is an individual, inclusion percentage is 25%
   R100,000 x 25% = R25,000
   
   
4. Deduct rebate of R10,000
   R25,000 - R10,000 = R15,000
   Thus R15,000 is to be included in Ms Hobble's taxable income.

For income tax calculation purposes, please note that if the entities' average capital gain for the period [net capital gain] amounts to a loss, the loss cannot be set off against the taxable income. An average capital loss can only be set off against future capital gains [i.e. you cannot reduce your taxable income with an average capital loss].

What is the base cost?

The base cost represents the cost that may be deducted from the proceeds of the sale of the property, before calculating the capital gain. This represents the following:

• The cost of acquisition [purchase price];
  
• The cost of creating an asset [building/contract price];
  
• The cost of obtaining a valuation;
  
• Remuneration of a surveyor, valuator, auctioneer, accountant, broker, agent, consultant and legal advisor;
  
• Transfer costs;
  
• Stamp and transfer duty;
  
• Advertising costs to find a buyer/seller;
  
• Moving costs [ only on acquiring or disposing of an asset];
  
• Installation costs [including foundations and supporting structures]
  
• The cost of improvements and enhancements to the value of the asset.
  
• Expenses incurred in maintaining the property may NOT be added to be base cost.

How will the value of a property be determined for CGT purposes?
Three methods are available to determine the value of the property CGT purposes:

• The first is to take 20% of the selling price as the original value of the property;
  
  
• The second is to work on a time-apportionment basis. Simply put, this implies that the original price paid for the property, is apportioned to the period from 1 October 2001 to the date of the transfer. Only the growth in the value of the property applicable to the period from 1 October to sale of the property is used in the CGT calculation.
  
  
• The third option is to have the property valued. As the responsibility rests on the owner to determine the value of the property, the Receiver will work on the 20% rule should the owner be unable to provide proof of the value as a 1 October 2001. Such valuation must be done before 30 September 2003 - value as at 1 October 2001. It is advisable that the value be determined by a qualified valuator or an agent of the clients choice. It should be noted that the client will be penalised should the receiver find that the property was over-valued for CGT purposes. For this reason, it is crucial that valuations obtained contain all relevant information proving how the value of the property was determined.
  
  
• For all purchases after 1 October 2001, the value of the property is the market value. Thus, the price paid by a willing buyer to a willing seller, transacting at arms length [i.e. there should be bo additional favourable circumstances that will influence the value of the price, for example father selling to son at a price below reasonable market value.]

Clients must submit the valuation of their property with their tax return. As the onus rests on the owner to prove the base cost of the property [market value plus allowable expenses incurred after 1 October 2001, the Receiver requires all such documentation to be kept for five years after disposal of the property.

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A list of frequently asked questions are also available on the Receiver's website... www.sars.gov.za