HAVE A BREAK – A TAX BREAK

CAPITAL GAINS TAX

Tiaan (MC) van der Berg

We don’t seem to be able to stop crime. Why not legalize it and tax it! Government has taxed many industries out of business before.

Government’s view of the economy could be summed up in a few short phrases:

1. If it moves, tax it2. If it keeps moving, regulate it3. If it stops moving, subsidize it

1. General

• 1 October 2001• Schedule 8 Income Tax Act

2. Why

• Widen tax net• Close loopholes

3. Who

All RSA Residents Non-RSA Citizens – Property in South Africa

4. What entities

• Natural Persons• Companies• Close Corporations• Trusts

5. CGT payable on what

Capital Gain (Profit) Alienation of Capital Asset Various categories of assets

VALUE AT ALIENATIONBASE VALUE – (minus)= CAPITAL GAIN

6. When is an asset capital

• When is gain - Capital- Income

• NB to distinguish• Income tax vs CGT

Factors : Intention: Frequency: Length of time: Nature of business: VAT

7. How is base cost calculated

• Cost of asset• Cost to obtain asset (Legal fees)• Cost to improve assete.g. Bought R1 000 000

Legal Fees R 10 000Transfer Duty R 25 000Jacuzzi R 30 000Base Cost R1 065 000

8. What is excluded from base cost

• Deductions in terms of income tax• Maintenance• Repairs• Cost of borrowing (interest)• Insurance• Inflation• Devaluation

Question:

Maintenance / repairs vs improvementse.g. replace swimming pool pump?

9. How does date of acquisition influence base value

• Before 1 October 2001 Valuation Time apportionment

Onus of proof• After 1 October 2001

Purchase price = Base value (+ other)

10. What triggers CGT?

Alienation - Sell

- Donate- Exchange

Deemed alienation – Death

11. Rates at which CGT is payable

• 2 Factors1. Portion of Capital Gain

X2. Effective income tax rate

CGT is paid with income tax

12. Rate - different entities pay CGT

A. Natural Persons

33% of Capital Gain X

0 – 40% Income Tax=

0 – 13.2% CGT(thus 13.2% of Total profit)

EXAMPLE:Alienation Value R500 000Base Cost R400 000Capital Gain R100 000R100 000 X 33% = R33 000 X 40% = R 13 200

= 13.2% of R100 000

MAX RATE AT WHICH ANATURAL PERSONPAYS INCOME TAX

B. Companies & Closed Corporations

66% of Capital Gain X

28% Income Tax=

18.48% CGT(thus 18.48% of Total profit)

EXAMPLE:Alienation Value R500 000Base Cost R400 000Capital Gain R100 000R100 000 X 66% = R66 000 X 28% = R18 480

= 18.48% of R100 000

C. Trusts

66% of Capital Gain X40% Income Tax

= 26.4% CGT

(thus 26.4% of Total profit)EXAMPLE:Alienation Value R500 000Base Cost R400 000Capital Gain R100 000R100 000 X 66% = R66 000 X 40% = R26 400

= 26.4% of R100 00013.Comparison

RATE AT WHICH

COMPANIES & CLOSED CORPORATIONSPAY INCOME TAX

Natural Person 0 – 13.2%CC / Company 18.48%Trust 26.4%

14. Exemptions / Rebates

1. R30 000 per year / Natural person

1. Primary Residence Rebate R2 000 000 Primary Residence Personal name

e.g. 1 Jan 2012 R3 500 000 Sell1 Oct 2001 minus R1 000 000 BuyCapital Gain = R2 500 000

Minus Rebate R2 000 000

Capital gain to be taxed: R 500 000X 13.2% = R 66 000

15. Selling Price

Price minus Commission

e.g. 1 Jan 2012 - R3 000 000 Sell - R2 000 000 BuyCapital Gain R1 000 000 Commission R 50 000Capital Gain = R 950 000

Calculation of CGT

EXAMPLE:

Primary residence

1 January 2002 – R1 million (purchase price)

1 January 2012 – R3.5 million (selling price)

Capital gains = R3 500 000

R1 000 000

R2 500 000

What is the amount CGT payable if :

1. NATURAL PERSON:a. on a primary residence

R2 500 000 Capital gain

R2 000 000 RebateR 500 000 x 13.2% (Maximum rate at which natural person pays CGT)

= R 66 000 capital gains tax due

b. on a non primary residenceR2 500 000 Capital gainR 0 RebateR2 500 000 x 13.2% (Maximum rate at which natural person pays CGT)

= R330 000 capital gains tax due

2. CC / PTY LTD:

R2 500 000 Capital gainR 0 RebateR2 500 000 x 18.48% (Flat rate at which company /

close corporation pays CGT) = R 462 000 – Note DWT

NOTE DWT : CC / PTY LTD Witholding tax

R3 500 000 Selling priceR1 000 000 Purchase priceR2 500 000 Capital gains x 18.4 % = R462 000 CGTR2 500 000 Capital gain

- R 462 000 CGTR2 038 000 Balance after PTY LTD / CC paid CGTR2 038 000 x 15 % DWT = R305 700

Total Tax payable R462 000 CGT R305 700 DWT

= R767 700

3. TRUST:

R2 500 000 Capital gain R 0 Rebate R2 500 000 x 26.4% (Flat rate at which a

trust pays CGT)= R 660 000

Comparison

Natural Person:CGT Primary residence: R 66 000CGT Non primary residence: R330 000

CC / Company:CGT: R462 000DWT: R305 700Total: R767 700

Trust:CGT: R660 000

17. Tax break in terms of Section 9(20) of the Transfer Duty Act• Primary residence• 2nd residence (50%)• Until 31 December 2012

TRUST PTY LTD CC

PERSONAL NAME / CONNECTED PERSON1. No Transfer Duty2. No DWT3. Base value rolls over

18. Benefit for Seller/ Owner:(Primary residence)

PTY LTD / CC = Seller

PTY LTD / CC R3 500 000

(Capital Gain R2 500 000) Seller Berty Buyer

• No Rebate• CGT Rate 18.48% R462 000• DWT 15.00% R305 700

Total Tax R767 700 Capitalisation costs 30.10%

TRUST = Seller

Trust R3 500 000

(Capital Gain R2 500 000)

Seller Berty Buyer • No rebate

• CGT Rate 26.4%• No DWTCapitalisation costs 13.2%CGT R660 600

NATURAL PERSON = Seller

R3 500 000

(Capital Gain = R2 500 000) Seller Berty Buyer

• Rebate R2 000 000• CGT Rate 0 – 13.2%• No DWT

Capitalisation costs 13.2% CGT R66 000

SOLUTIONTRUST Director/ Member / Trustee CC/PTY LTD

R3 500 000

(Capital Gain R2 500 000) Seller Price R3 500 000

Capital Gain R2 500 000

(Base value rolls over)

Berty Buyer