✔ A capital gain arises when you dispose of an asset
Capital gains tax (CGT) isn’t classed as a separate tax but forms part of income tax. A capital gain arises when you dispose of an asset on or after 1 October 2001 for proceeds that exceed its base cost.
Capital gains are taxed at a lower effective tax rate than ordinary income. Not all assets attract CGT and certain capital gains and losses are disregarded.
A withholding tax applies to non-resident sellers of immovable property. The amount withheld by the buyer serves as an advance payment towards the seller’s final income tax liability.
CGT applies to individuals, trusts and companies.
A resident is liable for CGT on assets located both in and outside South Africa.
A non-resident is liable to CGT only on immovable property in South Africa or assets of a “permanent establishment” (branch) in South Africa. Certain indirect interests in immovable property such as shares in a property company are deemed to be immovable property.
Some persons such as retirement funds are fully exempt from CGT. Public benefit organisations may be fully or partially exempt.
A few examples of assets are listed below:
For accounting purposes a deferred tax asset can arise, for example, when income that will be recognised for accounting purposes in a later financial year is subject to tax in the current financial year. The tax paid is recognised as an asset in the current year’s financial statements and only expensed in the year when the related income is recognised for accounting purposes. A deferred tax asset is not classed as an asset for CGT purposes.
The word ‘property’ refers to anything that can be disposed of and turned into money. Things that are incapable of private ownership are excluded.
For the purposes of provisional tax a taxable capital gain is excluded from the “basic amount”. You will have to take into account any taxable capital gain that arose or will arise during the year of assessment in estimating your taxable income for provisional tax purposes. Likewise, a taxable capital gain must be taken into account when making any third “topping up” provisional tax payment.
Income tax, which includes CGT, is paid on assessment using the normal methods.
A capital gain or loss determined in respect of the disposal of a personal-use asset of a natural person or a special trust must be disregarded.
A personal-use asset is defined as - ‘an asset of a natural person or a special trust that is used mainly for purposes other than the carrying on of a trade’.
Examples of personal use assets include artwork, jewellery, household furniture and effects, a micro light aircraft or hang glider, veteran cars, private motor, stamp or coin collections. In order to qualify as a personal-use asset the asset must be used ‘mainly’ for non-trade purposes. ‘Mainly’ equates to more than 50%.
A capital gain arising on the disposal of an asset other than a financial instrument by operation of law (for example, expropriation), theft or destruction is held over until the disposal of its replacement asset.