Capital Gains Tax (CGT) was introduced in South Africa with effect from 1 October 2011. It applies in all cases where capital gains or losses are made on the disposal of an asset unless it has been excluded by specific provisions. This capital gain or capital loss should then be declared in your annual income tax return.
For purposes of determining capital gains, the disposal of an asset can for example be triggered by the following events: the sale of an asset, the donation of an asset, exchange, loss or destruction of an asset, death, emigration etc. Capital gain is equal to the difference between the proceeds received because of a disposal and the base costs of an asset. The base cost of an asset depends on several different factors and can also include the costs incurred in respect of the acquisition or creation of the asset (transfer costs, transfer duty etc.), costs incurred for the improvement of the asset and direct costs in respect of the disposal of an asset.
As mentioned above, there are specific exclusions from capital gains tax, one of the most relevant exclusions being the exclusion pertaining to a natural person’s primary residence. A primary residence means a residence where you ordinarily reside and a residence that is used by you mainly for domestic purposes. You can only have one primary residence at a time.
The capital gain exclusion for a primary residence is R2 million. This means that you need to make a capital gain of more than R2 million before you will be subject to capital gains tax. Limits are placed on this exclusion in cases where the property is bigger than 2 hectares or where a portion of the property is being utilised for business purposes.
An annual exclusion of R40 000 capital gain is granted to individuals. This amount increases to R300 000 in the year of death of such an individual. In the end 40% of your capital gain (less the annual exclusion) is included in your taxable income. The effective rate of capital gains tax is therefore 18% for individuals.