Although most property transactions will not be subject to capital gains tax (CGT), it is still important for prospective sellers to understand the implications that it could have on their sale, should their home be sold for more than the primary residence exclusion threshold.
The ins and outs of capital gains tax
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In addition, the government has proposed that CGT inclusion rates be raised from 33,3% to 40% from March 1 this year.
“Capital gains is payable when the individual’s income tax return is submitted at the end of the financial year during which the property was sold. All records should therefore be kept for at least four years after the date that the income tax return reflecting the capital gain or lose is submitted,” says Adrian Goslett, CEO: Re/Max of Southern Africa.
Where proceeds exceed base cost
The tax pertains to the disposal of an asset such as an immovable property or any capital sale of assets globally, where the proceeds exceed its base cost, and applies to South African resident taxpayers, trusts and companies.
For a seller to determine the capital gain or loss made during the transaction, they need to deduct the selling price of the home from the base cost of the property. The latter is determined by combining the original price paid for the home, along with all costs incurred acquiring and selling the property. These costs would include transfer cost, transfer duty, agent’s commission, advertising costs, VAT and any professional fees.
Homeowners should also keep accurate records of the money they spend on their property, such as receipts for the costs of improvements, alterations and renovations – routine maintenance, insurance and rates and taxes may not be included. If they are unable to prove any costs through their records, they will not be able to deduct them from the proceeds to determine the capital gain.
Once the base cost has been determined, it is then possible for SARS to calculate the CGT to be paid based on the net profit realised.
Property tax is complicated
Non-residents are liable for CGT only on the sale of their immovable property in South Africa. Additionally a withholding tax applies to non-resident sellers of immovable property in terms of section 35A of the Act. The amount withheld by the buyer serves as an advance payment towards the seller’s final income tax liability.
There are numerous capital gains or losses on the disposal of an asset that are subject to taxation, there are instances where transactions are exempt due to certain concessions. The conditions pertaining to these exclusions are found in the Eighth Schedule to the Income Tax Act, 1962 (the Act), which determines a taxable capital gain or assessed capital loss.
“Property tax can be highly complicated, so it is always advisable for sellers to seek the advice of a professional tax consultant who can point them in the right direction regarding CGT,” advises Goslett. “An expert tax consultant or conveyancing attorney can offer invaluable guidance through the submission process.”