The determination of capital gains tax (‘CGT’) is regulated under the Eighth Schedule to the Income Tax Act (‘the Act’). The payment of CGT, which forms part of income tax, arises on the disposal of an asset, including immovable property, on or after 1st October 2001 for proceeds exceeding the asset’s base cost. Under the Act, a ‘disposal’ includes the sale, donation, or expropriation of an asset, and the vesting of an asset of a trust in a beneficiary.
The formula for calculating CGT is: Capital gain minus any exclusions x inclusion rate x marginal tax rate.
First, a capital gain is calculated by subtracting the base cost of the asset, which includes professional fees, transfer costs, transfer duty, improvements, and the costs associated with disposal, from the sale price. The costs of improvements and alterations are also deductible provided that these expenses can be proved. In essence, the gain is the profit made on the investment.
To reduce the amount of CGT payable, the Act makes provision for various exclusions. For instance, if an individual sells their primary residence, the first R2 million of the capital gain is excluded from the calculation. Additionally, most personal use assets, payments concerning original long-term insurance policies, and retirement benefits are also excluded. Further, individuals and special trusts are granted an annual exclusion of R40 000.
Second, the capital gain is multiplied by the inclusion rate. For individuals, 40% of the capital gain is taxed. Conversely, if the asset is owned by a company, close corporation, or trust, 80% of the capital gain is taxed.
Third, the result is multiplied by the individual or entity’s marginal tax rate. Since income tax is levied on a sliding scale, the more one earns, the higher one is ultimately taxed.
*The author previously published a version of her content on STBB’s social media platforms.
