“I’ll tax the street, I’ll tax your seat, I’ll tax the heat, I’ll tax your feet.” (Adapted from Taxman by The Beatles)
1. Why do I have to pay CGT in the first place?
Following a worldwide trend, South African authorities introduced CGT in 2001 to broaden the tax base. Before CGT was introduced, salaried employees shouldered the vast majority of the country’s tax burden, a situation that was clearly unfair. CGT also ensures that affluent citizens who buy and sell assets should pay more tax – as it should be in a country like South Africa.
2. How’s CGT different to income tax?
CGT is just one component of your income tax. When you sell an investment, 40% of the profit is added to your income and taxed at your marginal tax rate. CGT applies to shares, unit trusts, property, crypto currency and the sale of privately-owned businesses.
3. Can I avoid paying CGT?
The only surefire way to avoid paying CGT is by investing in retirement funds (RAs, provident funds, pension funds or tax-free savings accounts) as these don’t attract CGT. It’s impossible to avoid CGT by hanging onto an investment because when you die, the law deems your investments sold, and CGT kicks in.
4. But surely there are some exemptions?
Thankfully there are! Some big exemptions include:
- R2 million CGT exemption on the sale of your primary residence.
- Annual R40,000 exemption applies to all capital gains within a tax year. In other words, you can sell investments with combined profits totalling R40,000, without having to pay CGT.
- R1.8 million once-off exemption for individuals over the age of 55 selling small businesses (valued under R10 million).
- CGT doesn’t apply to the sale of personal items (cars, art, jewellery, small boats, light aircraft etc.), donations to approved benefit organisations, or proceeds from a life policy.
- Non-residents only pay CGT on immovable property in South Africa.
5. What if my home is jointly owned or owned by a trust?
If you sell a home that’s jointly owned, both parties must declare the total gain to SARS. Both the profit and the primary residence exclusion will then be split. Both parties will also be able to utilise their individual annual exclusion of R40 000.
The primary residence exclusion of R2 million doesn’t apply to ordinary trusts but it can apply to special trusts (for example, for a person with a disability).
6. How does CGT apply when you trade for a living?
If you trade in forex, cryptocurrency, shares or property with the intention of making a short-term profit, your profits are seen as income and taxed at your marginal rate (generally higher than CGT).
7. What happens if your investment makes a loss?
If you sell an investment at a loss, you can’t write this off against your income. You can, however, use the loss to reduce how much CGT is payable. This loss can also roll over to subsequent tax years.
8. What happens when I die?
The only way around CGT is to invest in retirement funds because you are deemed to have sold any investments held when you die. After death, there’s a R300 000 exemption on CGT.
A quick disclaimer
All information was correct at the time of writing but some of the finer details may change after the budget speech is (presumably) delivered on 12 March.
The bottom line
While capital gains tax (CGT) can seem very unfair, why not look at it from another angle? At least it means you’re improving your financial situation year-on-year – which is not something many South Africans can say.
Of course, minimising tax is integral to financial planning, but you should never avoid selling an investment because you’re wary of CGT. We’d advise investing in retirement funds, holding other investments for the long term, and always working closely with us.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
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