Capital Gains Tax

1. What are capital gains and losses?

A capital gain is the profit you make when you dispose of an asset, such as shares, a property or unit trusts. Profit takes into account the cost to you of the asset, plus the cost of anything you have don’t to make the asset more valuable. You will only be taxed on that part of the capital gain which accrues after the tax kicks in on October 1 2003. Say, you bought shares in October 1980 and sold them in October 2003. You will pay tax only on the increase on the price of the shares between October 2001 and October 2003.

2. What is not affected by the tax?

The property you live in, unless you make a gain of more than R1 million or unless it is bigger than two hectares;
Your car, unless you use it for business purposes;
Clothes, jewellery, stamps, art works, antiques, collectors’ coins and other personal effects;
Lump sums from your pension, provident or retirement annuity funds;
Lump sums from endowments; compensation for injury, illness or defamation;
Winnings on the national lottery, the horses or from a casino;
Any gain you make when you exchanges foreign currency for rands when you come back from an overseas trip; and
A gain of up to R500 000 on the sale of the assets of your small business when you retire.

3. What is affected?

Shares;
Unit trusts;
Land;
Property you do not use as your primary residence (and that means rights to property as well);
Large boats and aircraft;
Plant and machinery;
Krugerrands;
Mineral rights; and
All other assets except those specifically excluded


4. What is the tax rate?

You will declare capital gains as part of your normal income tax return. As an individual, you will be taxed on one quarter of your aggregate capital gains – the total of all the capital gains you make in a year, less any capital losses.
The first R10 000 of your aggregate capital gain or loss is disregarded. On the rest of your gain, you will be taxed at your marginal rate (the highest rate of tax you pay on your income). For example, if you are on the top marginal rate of 42 percent and make a capital gain of R20 000, your CGT would be calculated as follows:
R20 000 less R10 000 = R10 000; divide by one quarter = R2 500; tax at 42 percent = R1 050.
You can offset capital losses against capital gains, but you cannot offset capital losses against them.

5. What is the object of the tax?

The main point of introducing CGT is not to raise money, the South African Revenue Service says. The tax is expected to bring relatively small amounts into the government’s piggy-bank – R200 million in the first years and between R1 billion and R2 billion a year in time. Rather, the tax is designed to plug holes in the tax system. In the absence of a capital gains tax, sophisticated taxpayers can convert income (which is taxable) into capital gains (which are not) and this erodes the country’s tax base. Many other countries have CGT.

6. What is base cost?

Capital gains are the difference between the base cost of the asset and the sum you get on sale or disposal.
Base cost includes:
Acquisition costs – what you paid in order to acquire the asset;
Costs associated with acquisition and disposal – for example, legal fees, agent’s commission, stamp duty, advertising costs, broker’s fees, transfer duty, conveyancing;
VAT;
Improvement costs – what you spent on improving the value of the asset; and
Any legal costs you incurred. For example, if you had to fight a court battle to maintain your right to an asset you already owned.
You are not allowed to claim current expenses, such as insurance, repairs and interest on a loan, as base costs. But if you bought a second home and sold it at a profit, for the purposes of calculating a CGT liability you would be able to claim the price of the house, any improvements (not repairs) you made and the estate agent’s commission on the sale.