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Capital Gains Tax

Posted under Guides

What is Capital Gains Tax? 

Capital Gains Tax was introduced on 1 October 2001. It forms part of normal income tax and is based on the sliding tax tables for individuals. It comes about most often for taxpayers when their home or investment property is sold for a profit (gain) i.e. the proceeds/selling price is more than the “base cost”. The “base cost” is the purchase price plus any amounts spent on renovations or improvements, plus a few other smaller costs.

When you buy and sell your home, there are lots of bills to pay like lawyer’s fees, estate agent’s commission and compliance certificates for example. Knowing which costs to take into account when working out the proceeds and base cost can be complicated! Look at our Capital Gains Tax Calculator for more detailed advice on this.

This profit (or capital gain) is taxed at a lower rate than normal income – because only a portion of the capital gain (currently 40%) is included in taxable income, and not the full profit. So, selling your investment is not taxed at the same rate as money you earn from your salary, thank goodness!

This may sound concerning, but the Tax Act does provide a R2 million “primary residence exclusion” for those taxpayers who sell their primary residence (i.e. the home in which they live). This means that the first R2 million of your capital gain is exempt from tax, meaning that most taxpayers won’t actually need to pay Capital Gains Tax on the sale of their home.

It's important to know that Capital Gains Tax doesn’t apply when you sell personal use assets. So, there’s no need to declare the details of your recent car sale or washing machine to the tax man!


Selling your primary residence


In this example, the R2 million primary residence exclusion would apply. If your home is sold for a gain (i.e. proceeds minus base cost) that is less than R2 million, the sale will not attract Capital Gains Tax.

Example 1:
Paul buys a home for R2 500 000. He spends R400 000 renovating it, and then sells it for R4 000 000 a few years later. Paul lived in this house for the whole time that he owned it and therefore it would be regarded as his primary residence for tax purposes.
Excluding the capital gain, Paul’s taxable income for 2019 is R500 000.

The capital gain calculation for the tax year of 2019 is:

Base cost = R2 500 000 + R400 000 = R2 900 000
Proceeds = R 4 000 000
Capital gain = R1 100 000 (i.e. R4m – R2.9m)
Less: primary residence exclusion of R2 000 000
Taxable capital gain = nil

You can also use TaxTim’s handy Capital gains calculator to do the calculations for you.

Because the capital gain on Paul’s primary residence is less than R2 million, the entire gain is exempt from capital gains tax and he doesn’t have to pay any.
Remember that every individual taxpayer also has an annual capital gain exclusion of R40 000 which needs to be taken into account first when figuring out the final capital gains tax that will be owed.


Selling your investment property

If you sell a property which is not your primary residence (i.e you own it and rent it out), you can’t apply the primary residence exclusion to this gain. This means that if your gain is greater than the annual exclusion of R40 000, it will attract capital gains tax.

Let’s look at the same example again but assume now that Paul has never lived in the house that he bought. He rented it to a tenant while he lived in a nearby property with his girlfriend i.e. he bought the house purely as an investment.



Example 2:

Base cost = R2 500 000 + R400 000 = R2 900 000

Proceeds = R4 000 000

Capital Gain = R1 100 000 (i.e. R4m – R2.9m)

Primary residence exclusion will NOT apply.

Taxable Capital Gain = R1 100 000 – R40 000 (annual exclusion) = R1 060 000

The inclusion rate for capital gains is 40% for individuals.

Capital gain inclusion in taxable income = 40% x R1 060 000 = R424 000

Paul’s taxable income = R500 000 + R424 000 = R924 000

Paul’s marginal rate of tax is 41% so he will pay approximately R173 840 capital gains tax. (You can work this out by taking R424 000 x 41%)

You can also use TaxTim’s handy CGT calculator to do the calculations for you.

Selling your primary residence, which you rent out for a period

The above two examples are clear cut, so the capital gains tax calculation is quite simple i.e. it’s either your primary residence, or it’s never used for that purpose.

But what if you originally used it as your primary residence, but then moved out later and rented it to a tenant? Or, you first rented it out and then used it as your primary residence afterwards? This is the situation many confused taxpayers face, and they want to know how this affects the capital gains tax they need to pay when their property is sold.

The answer? The capital gain on the sale needs to be apportioned between primary residence use and non-primary residence use. The R2 million primary residence exclusion is applied to the portion of the gain, which relates to the primary residence use only. This means that you will need to pay capital gains tax on the remaining portion of the gain.

Let’s look at the same example again, but assume now that Paul lived in the house for five years and then relocated to a different city for three years, during which time he rented out his house. He then sold it eight years after buying it.

Example 3:

Base cost = R2 500 000 + R400 000 = R2 900 000

Proceeds = R4 000 000

Capital Gain = R1 100 000 (i.e. R4m – R2.9m)

Primary residence = 5 years
Non-primary residence = 3 years

Portion of the capital gain attributable to the property’s use as a primary residence:

5/8 x R1 100 000 = R687 500
Less: R2m Primary residence exclusion = nil capital gain

Portion of the capital gain attributable to the property’s use as a non-primary residence:

3/8 x R1 100 000 = R412 500
Primary residence exclusion will NOT apply.
Taxable Capital Gain = R412 500 – R40 000 (annual exclusion) = R372 500

Capital gain inclusion in taxable income = 40% x R372 500 = R149 000

Paul’s taxable income = R500 000 + R149 000 = R649 000

Paul’s marginal rate of tax is 39%, so he will pay approximately R58 110 capital gains tax.
You can also use TaxTim’s handy CGT calculator to do the hard work for you.

As you can see from the examples above, the amount of capital gains tax payable varies widely depending on what you’re using the property for. There was no tax payable when it was used only as a primary residence, R173 840 payable when it was not used as a primary residence at all, and R58 110 to pay when it was used for some of the time as a primary residence and rented out for the rest of the time.


How to reflect the sale of your home in your tax return (ITR12)

In the Capital Gain/Loss section of the opening wizard, indicate that you disposed of an asset - this will open the Capital Gain/Loss section of your tax return.

If the property you sold was your primary residence (example 1), tick the Yes block in the section which asks this question. SARS will then apply the R2 million primary resident exclusion to the capital gain on assessment.

If the property sold was not your primary residence (example 2), tick the No block in the section which asks this question. The primary residence exclusion will not be applied to this transaction when you’re assessed.

If the property sold was not your primary residence for the full amount of time that you owned it, you need to report the details of the property sale as two separate transactions (example 3). Do this by indicating in the opening wizard that two disposals happened. This will open up two capital gains/loss sections, so that you can capture the details of each separately.

For example 3, let’s look in more detail how Paul would capture his disposal in his tax return.

He must indicate in the opening wizard that he made two disposals.

Disposal 1:

Primary residence - YES

Proceeds: 5/8 x R4 000 000 = R2 500 000

Base Cost: 5/8 x R2 900 000 = R1 812 500

Gain: R2 500 000 – R1 812 500 = R687 500

SARS will apply the R2 million primary residence exclusion on assessment, so that capital gains tax will be zero.

Disposal 2:

Primary residence - NO

Proceeds: 3/8 x R4 000 000 = R1 500 000

Base Cost: 3/8 x R2 900 000 = R1 087 500

Gain: R1 500 000 – R1 087 500 = R412 500

On assessment, the R40 000 annual exclusion will apply and therefore 40% of R372 500 (R412 500-R40 000) will be added to his taxable income.

How home office deduction impacts capital gains tax

With flexible employment being the latest trend, more people are working part or all of the week from an office in their own home. This cuts down on the traffic they have to deal with and saves employees valuable time, which they can use to be more productive.

Home office expenses count as a tax deduction if they meet various conditions. This means that they reduce your taxable income and ultimately your tax liability. However, not just anyone qualifies to deduct his or her home office expenses. Check out our decision tree to see if you qualify. You can also read our blog to find out what you can deduct and how to work this out.

While people are eager to claim this home office tax deduction so that they can reduce their taxable income (and ultimate tax liability), few understand the negative tax impact a home office has on the calculation of their capital gains tax, when they sell their property in the future.

Here’s an example:

Sarah bought a home in February 2007 for R1 200 000. In February 2015, she did some renovations to add an extra bedroom costing R300 000. She lived in this home until February 2019 when she sold it for R3 500 000. Her taxable income for 2019 was R600 000.

The Capital Gains Tax calculation is as follows:

Proceeds: R3 500 000

Base Cost: R1 200 000 + R300 000 = R1 500 000

Capital Gain (proceeds – less base cost): R3 500 000 – R1 500 000 = R2 000 000

Less: primary residence exclusion: R2 000 000 – R2 000 000 = nil

The annual exclusion of R40 000 is not relevant here because the Capital Gain is nil, so it cannot be reduced further.

Therefore, the sale of Sarah’s home has no impact on her capital gains tax liability. This is because the capital gain (R2m) is equal to the primary residence exclusion (R2m) which reduces it to nil.

You can also use TaxTim’s handy CGT calculator to do the hard work for you. Let’s use the same example and assume all details remain the same, but instead of an extra room, Sarah carried out renovations for R300 000 to add on an office from where she worked until she sold her home in February 2019. The office space made up approximately 10% of her total house space (i.e it was 10 square metres, while her entire home was 100 square metres) and she therefore claimed 10% of her house running costs as a tax deduction against her business income.

In this situation, the Tax Act requires the capital gain to be apportioned between primary residence use and business use. This apportionment must take into account these two factors:

1. The length of time that the home office was used as a portion of the entire period of ownership (4 years out of 12 years in our example) 2. The size of the home office compared to the size of the entire property (10% in our example)

Assuming all other details are exactly the same as in the first example, the Capital Gains Calculation is as follows:

Proceeds: R3 500 000

Base Cost: R1 200 000 + R300 000 = R1 500 000

Capital Gain (proceeds – less base cost): R3 500 000 – R1 500 000 = R2 000 000

Less: apportionment for period (4 years) during which home was partially used (10%) for home office purposes:

R2 000 000 x 4/12 x 10% = R66 666

Portion of the capital gain attributable to the property’s use as a primary residence:

R2 000 000 – R66 666 = R1 933 334

Less primary residence exclusion: R1 933 334– R2 000 000 = nil.

Portion of the capital gain attributable to the property’s use as a home office:

R2 000 000 – R1 933 333 = R66 666

Total Capital Gain: R66 666

Less: annual capital gain exclusion R66 666 – R40 000 = R26 666

The inclusion rate for capital gains is 40% for individuals. This means that 40% of the gain (i.e. R26 666 x 40% = R10 666) is added to Sarah’s taxable income and will be taxed at her marginal rate of tax.

If we assume her marginal tax rate is 36%, then approximately R3 840 capital gains tax will be payable (i.e. R10 666 x 36%).

Just a reminder: if she had not used part as a home office, then the capital gains tax on the disposal of the property would have been nil because the primary residence exclusion of R2 million would have been applied to the entire gain.

Sarah would need to compare this capital gains tax (R3 840) with her annual tax saving from claiming a home office deduction, to see which is better from a tax perspective. It seems like it would be worth it for Sarah to claim home office expenditure annually and the tax benefits would outweigh the capital gains tax she would need to pay when selling the house. Reporting your asset disposals to SARS can be confusing and the tax implications of a mistake can really cost you. Let TaxTim help you work out the correct proceeds and base cost to ensure your submission is 100% correct.

How the sale of shares/investments impacts capital gains tax

The sale of shares or investments attract Capital Gains Tax in the same way as the sale of a property. You would add up the amount received for the shares sold (Proceeds) and take off the amount paid for the shares when you bought them (Base Cost). The difference would be the capital gain.

The gain would be added to all your other capital gains for the year (less any exclusions) and then you would include 40% of the total in Taxable Income and be taxed as per the tax tables, similar to the examples above.

Every year, the fund or financial institution where your money is invested in will send you what is called an IT3c. This represents sales of shares or unit trusts you may own.

Look out for the words:
• Gross Proceeds
• Base Cost
• Weighted Average Base Cost

All these words are interchangeable and essentially mean what you sold for and what you bought for. If you’re unsure of what amounts are shown on the IT3c, then call your bank or financial institution and they will be able to help. Otherwise you can always ask our tax experts for guidance too.

When completing your tax return, you can add all share/unit trust sales together and then include all the proceeds and all the costs under one disposal.


FAQ

1. How is the sale of Bitcoin treated for tax purposes?

SARS have issued guidance stating that Bitcoin must be treated as a normal share trade. So, if you're trading it for revenue purposes then the gains and losses will be treated as a revenue transaction and taxed similar to a salary. You would need to include the gains/losses in the Local Business section of your tax return. If you hold it for investment purposes however, (i.e for a period of 3-5 years) then this would be treated as if it were a normal capital gain on sale. Essentially, if you want to hold bitcoin as a long-term investment and you don’t buy and sell frequently, then this would be seen as capital not revenue.

2. I sold a property in March 2019, which I used to rent out to tenants. Do I need to include the capital gain in my August 2019 IRP6 (provisional return) or can I just declare it in my 2020 ITR12?

Yes, you should include the capital gain in your estimate of taxable income in your IRP6. Remember to deduct the R40 000 annual exclusion and only include 40% of the gain. If you leave it out and only declare it in your annual tax return, then you run the risk of incurring penalties and interest for under-estimation of your provisional tax.

3. How do I declare repairs and maintenance expenditure and renovations to my rental property?

You would need to look at the nature of the expense, to ensure it is treated correctly for tax purposes. Repairs and maintenance expenditure would be to fix something that has broken or to restore it to its previous (original) condition. This type of expenditure is allowed as a tax deduction against rental income and you would declare it in the Rental section of your tax return.

Renovations or improvements on the other hand, would generally increase the income earning capacity of the property, like adding an additional room. This is regarded as a capital expense and is therefore not deducted from taxable income, but added to the cost of the property in order to reduce capital gains tax when you sell it one day. You would include these costs in the base cost of the asset, which you would declare in the Capital Gains section of your return.

4. On 1 March 2014 my employer granted me an option to purchase 10 000 equity shares in the company for R75 each. The conditions attached to the grant of the option were that I would not be able to dispose of the shares for five years or until I resign, whichever occurred first. I decided to sell the shares on 5 March 2019 when they had a market value of R123 each. How will this transaction be taxed?

There will be capital gains tax payable when you sell the shares. The gain will be calculated based on the difference between the proceeds (R123) and the option cost (R75), multiplied by the number of shares. After deducting the R40 000 annual exclusion, 40% of the gain will be included in your taxable income.

5. If a couple is married in community of property, does the capital gain on the sale of their primary residence get split between the two on their tax returns (if the CGT profit is over R2 million)? i.e do they each pay 50% tax on the profit?

Yes, that is correct, the gain will be split between the couple with half on each tax return. Each individual must declare the full proceeds and base cost on their return and also ensure they indicate they are married in community of property and then SARS will split the gain on assessment between each of them.

6. I bought a used bakkie from a friend at his book value and sold it soon after at a good profit. Will it be taxed as a capital gain?

If you’re in the business of buying and selling cars, then the profit would be taxed as normal income as this would be a revenue generating activity (i.e business). However, if this was more of a once-off event and not considered your trade, then you would not need to declare it. A car is considered to be a personal asset and therefore would not be subject to capital gains tax on disposal.

7. I would like to know what the tax implications are on exchange gains/losses on a foreign bank account. I know the interest is taxable but are the gains/losses on the capital from forex fluctuations taxable?

There is no capital gains tax payable on foreign exchange gains made on offshore bank accounts.

8. Can I deduct bond initiation fees and transfer costs from rental income?

No, these are capital costs which cannot be deducted from taxable income. They must be added to the base cost of the asset in order to reduce capital gains tax when you dispose of the property in the future.

9. What do I do with shares I sold during the year in a unit trust?

You would have to declare the proceeds and base costs from these shares and pay capital gains tax on the difference between what you sold the shares/unit trusts for and what you originally paid for them.

10. When I declare the capital gain from selling my home, do I include the net proceeds from the estate agent or only the amount I owe the bank?

You would ignore the amount you owe the bank when you make the sale, as this is just the remaining balance. You need to include as proceeds, the amount actually received from the new buyer less any selling/agent’s fees.

11. If I sell my home to my spouse, what do I do?

This is a simple and good news tax story, as transfers between spouses are tax free so you don’t need to pay any tax at all on this sale. Just remember to include it in your tax return though, as the proceeds will be equal to the base cost.