Before you count your profit, watch out for what’s quietly lurking beneath — capital gains tax. Here’s what every homeowner, investor, and trustee should know before signing on the dotted line…

Capital gains tax (CGT) forms part of every disposal of immovable property, and every homeowner, whether an individual, company or trust, should be aware of the CGT that may apply to their disposal of property. 

CGT is regulated under the Income Tax Act 58 of 1962 (“Income Tax Act”) and is payable by individuals and legal entities such as companies and trusts on the disposal of capital assets such as immovable property. A capital gain arises when you dispose of an asset on or after 1 October 2001 for proceeds that arise from a sale, and which exceed the base cost of the asset. CGT can therefore reduce the final proceeds that arise from the sale of property, as CGT will apply if the asset is sold above its base cost. The Income Tax Act provides a wide definition of “disposal”, including the sale, donation, expropriation of an asset, and even the vesting of an interest in an asset of a trust in the name of a beneficiary.

CGT is not a transactional tax, as is the case with VAT and Transfer Duty, the latter being calculated on the date of the transaction. Rather, CGT is a tax that forms part of your income tax calculation and must be calculated on an annual basis.

The formula used to calculate CGT is essentially taking the capital gain (less any exclusions) and multiplying it by the inclusion rate and then also the marginal tax rate of the taxpayer (i.e. CGT = capital gain (less exclusions) x inclusion rate x marginal tax rate). Therefore, the first step will be to calculate the capital gain or loss, and this is done by deducting the base cost, being the cost that was paid when the asset was acquired (including the cost of improvements, agents cost, transfer duty, attorney costs and so forth) from the sale price of the asset.

The Income Tax Act also provides for certain exclusions that may be deducted from the amount of capital gain, with the most important of these being where an individual sells his/her primary residence, allowing an exclusion of the first R2 million capital gain from the total gain. This exclusion is only applicable to property owned in the name of a private person and not applicable to property owned in the name of a company or a trust (except a special trust), and it must be the individual’s primary residence. If a second property is disposed of, the R2 million exclusion will not be applicable, and an individual can only deduct the allowed R40,000 annual exclusion from the capital gain.

Once capital gain has been calculated and the necessary exclusions deducted, the capital gain is multiplied by the inclusion rate. The inclusion rate refers to the percentage of the capital gain that is taxable, which is currently 40% for individuals and 80% for trusts and companies.

Lastly, the result of the latter is multiplied by the individual or entity’s marginal tax rate. Seeing as income tax is levied on a sliding scale for natural persons, the higher the individual tax rate of the taxpayer, the higher the amount of CGT payable.

It should be noted that death is considered a CGT triggering event, as it is treated as a deemed disposal of the deceased person's assets at their market value on the date of death. As a result, the deceased's estate may incur a CGT liability, something many people fail to plan for.

It is important to note that CGT is calculated on each asset that is disposed of during a financial year. Should you therefore dispose of various assets, for example, the sale of property and the sale of shares in a business, in one financial year the capital gains tax for each of these assets will be calculated and added together for payment. It is therefore important to discuss the implication of capital gains tax with your tax advisor before embarking on the disposal process to make sure that you plan ahead and have the necessary funds available at the end of the financial year to cover your CGT responsibility.


Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s).