Capital Gains

9 assets that you must pay Capital Gains Tax on

The “CGT monster” was set loose on taxpayers on 1 October 2001, introducing a complex burden on taxpayers.

Capital gains tax is a tax you pay on the profits you make when you sell or dispose of your assets.

The biggest CGT fear tax payers have is that they are doing it wrong. With all the complicated rules, terminology and tax forms, taxpayers just are'nt  sure what to declare or how to declare the gain (or loss) correctly.

For a start, only a portion of the capital gain is included in your taxable income:

·         25% in the case of individuals and special trusts (e.g. a trust set up by means of a will, or a trust set up for a disabled person

·         50% in the case of companies, close corporations and other trusts (e.g. an inter vivos trust, which is effective during the life of the founder or donor)

The Practical Tax Loose Leaf Service tells you which assets you need to pay CGT on:

9 assets that are subject to capital gains tax:

Gains made on the disposal of the following assets will generally be taxed:

1.       Main residence owned by a company, close corporation or trust other than a special trust

2.       Holiday homes or second homes and properties let to tenants

3.       A boat exceeding ten metres in size

4.       Caravans

5.       An aircraft, the empty mass of which exceeds 450 kilograms

6.       Shares, unit trusts and private investments, and second-hand policies

7.       Kruger Rands or other silver, platinum, or gold minted coins or any other coin the market value of which lies mainly in the metal it's made of

8.       Sale of your business, other than on retirement

9.       All other capital assets except those specifically excluded.

When is capital gains tax chargeable, and payable?

The happening that triggers any CGT event is the disposal of an asset. Unless such a disposal occurs, no gain or loss arises. As a general rule, an asset is acquired or disposed of whenever there is a change in ownership of the asset. A disposal is any event, act, forbearance or operation of law, which results in the creation, variation, transfer, or extinction of an asset.

Once a person’s taxable capital gain has been determined, it is included in the person’s taxable income for that year of assessment in terms of section 26A of the Income tax Act. If a person sustains an assessed capital loss for the year, that loss cannot be set-off against the persons taxable income, but it is carried forward to subsequent years, for set off against any future taxable capital gains.

2. From what date are capital gains taxed?

The commencement date for capital gains tax is 1 October 2001.

3. Who is liable to pay CGT?

Any person (an individual) or any legal person (including a company, close corporation, a trust or individual policyholder fund of an insurer) resident in the Republic, as defined for income tax purposes, in respect of capital assets held both in the Republic and outside the Republic.

Where a natural or legal person is not a resident of the Republic, a liability in respect of CGT will arise where a disposal occurs on or after 1 October 2001 in respect of : -

Immovable property (including mineral rights) or any interest or right of whatever nature of the non- resident person to or in immovable property situated in the Republic. An interest includes a direct or indirect interest of at least 20 per cent in a company or any other entity where 80 per cent or more of the net value of the assets owned by that company or other entity at the time of disposal is attributable to immovable property situated in the Republic.

The assets of any permanent establishment, branch or agency in the Republic through which a trade, profession or vocation is being carried on by the non-resident.

4. Should I have sold all my assets before valuation date to avoid CGT?

No, not unless there were other good reasons for doing so. The reasons for this are as follows::

Any capital gain on an asset attributable to the period before the valuation date is not subject to CGT. Only the post-valuation date capital gain is subject to CGT.

There are numerous exclusions, meaning that there is a possibility that no CGT will be payable on the gain in any event.

The first R10000 (known as the annual exclusion) of the net annual capital gain or loss is excluded from CGT.

In the case of an individual, only 25% of the net capital gain will be subject to CGT and the maximum rate of tax is, therefore, 10 per cent.

5. If a non-resident sells shares, will the transaction be subject to CGT?

Generally, no. In terms of para 2 of the Eighth Schedule non-residents are only liable for CGT on immovable property in SA and assets of a permanent establishment in SA. There is, however, an exception to this rule in the case of property owning companies. The disposal of shares in a property company owned by a non-resident will be subject to CGT if that non-resident-

directly or indirectly owns 20% or more of the shares in that company; and

80% or more of the market value of the net assets of that company consist of immovable property in SA.

Shares held by connected persons in relation to the non-resident must be taken into account in determining whether the non-resident has a 20% interest.

1. Will the sale of my primary home be subject to CGT?

The first R1.5 million of gain or loss on disposal of a primary residence must be disregarded. This concession, known as the primary residence exclusion, means that most individuals will not be subject to CGT on the sale of their homes.

Thus if the primary residence is sold for a gain of R2 million, the first R1.5 million is excluded and the remaining R500 000 is subject to CGT.

2. What is a primary residence?

A residence must meet certain basic requirements before it may be considered a primary residence (Paragraph 44 of the Eighth Schedule).

• It must be a structure, including a boat, caravan or mobile home, which is used as a place of residence by a natural person.
• A natural person or special trust must own an interest in the residence.
• The natural person with an interest in the residence, beneficiary of the special trust, or spouse of that person or beneficiary must ordinarily reside in the home and must use it mainly for domestic purposes as his or her ordinary residence.

Where the primary residence is disposed of together with the land on which it is situated (including unconsolidated adjacent land) the R1 million exclusion will apply to land -

• to the extent that it does not exceed two hectares,
• that is used mainly for domestic and private purposes together with the residence, and is disposed of at the same time and to the same person as the residence.

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3. I enter into a long-term lease for a building which I then use as my primary residence. I then sell this right for a R2 million profit. Can I claim the R1.5 million exemption?

Yes, provided it satisfies the requirements of a primary residence. For the purpose of the discussion that follows only the nature of a lease is focused on

'primary residence' means a residence—
(a) in which a natural person or a special trust holds an interest; and

(b) which that person or a beneficiary of that trust or a spouse of that person or beneficiary—….

'an interest' means—
(a) any real or statutory right; or

(b) a share owned directly in a share block company as defined in the Share Blocks Control Act, 1980 (Act No. 59 of 1980) or a share or interest in a similar entity which is not a resident; or

(c) a right of use or occupation, but excluding

(i) a right under a mortgage bond; or

(ii) a right or interest of whatever nature in a trust or an asset of a trust, other than a right of a lessee who is not a connected person in relation to that trust;

A long-term lease is a right of use or occupation. This is confirmed by the Explanatory Memorandum (page 77):

‘the third envisages the case of, for example, a 99-year lease or any similar right, which may be disposed of by a qualifying person without ownership in the actual residence being affected.’

4. (a) Is the primary residence exclusion an unlimited exclusion?

No, certain limits have been placed on the exclusion.

·         The exclusion will not apply to any capital gain or loss in excess of R1.5 million. This means that where the primary residence is sold, say for a gain of R2 million, the first R1.5 million of the capital gain is excluded while the remaining R 500 000 is subject to CGT (paragraph 45(1) of the Eighth Schedule).

·         A person may not claim the primary residence exclusion for more than one residence at a time (par 45(3) of the Eighth Schedule). You can only have one primary residence at a time.

·         The exclusion will only apply in respect of two hectares of property used for domestic or private purposes. This means that where the property is larger than this the capital gain or loss that will be excluded will be apportioned (para 46 of the Eighth Schedule).

·         The exclusion will not apply to any capital gain or loss in respect of a period on or after the valuation date when the person was not ordinarily resident in the primary residence (para 47 of the Eighth Schedule).

·         The exclusion will not apply to any capital gain or loss in respect of that part of a primary residence that has been used for the carrying on of a trade after the valuation date (para 49 of the Eighth Schedule).

4.(b) Will it apply to a residence held through a company or a trust?

No, the owner is not a natural person. However, the estate planning, limited liability, or other considerations that led to the property being placed in a company or trust may outweigh the advantage of the primary residence exclusion

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5. What happens if I dispose of my primary residence in a joint estate, and I have a capital gain in excess of R1.5 million?

Where a property is sold that falls within the joint estate of spouses married in community of property, the disposal will be treated as having been made in equal shares by each spouse and the primary residence exclusion will be apportioned between them .(paragraphs 14 and 45(2) of the Eighth Schedule )

Example

Husband Spouse Joint

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6. What happens if I do not ordinarily reside in my home as I have moved before selling it, I am still building a home on a new property, or for some other reasons?

You will be treated as having been ordinarily resident in your primary residence if you were not ordinarily resident during a period not exceeding two years for any of the following reasons (paragraph 48 of the Eighth Schedule):

• Your old primary residence was in the process of being sold whilst a new primary residence was acquired or was in the process of being acquired.
• Your new home was undergoing renovation or improvement prior to your taking up residence.
• Your home was being built on land acquired for the purpose of being your primary residence.
• Your primary residence had been accidentally rendered uninhabitable.

A residence is treated as having been used for domestic purposes during any continuous period of absence there from while the residence is being let under the following circumstances:

• The residence must not be let for more than five years.
• You or your spouse resided in the residence for a continuous period of at least one year prior to and one year after period of absence.
• You treated no other residence as a primary residence during your absence.
• You were temporarily absent from the Republic or employed or engaged in carrying on business in the Republic at a location further than 250km from that residence.
  (Paragraph 50 of the Eighth Schedule)

7. I work in Johannesburg where I bought a townhouse to stay. My wife and three children still stay in Umtata, my hometown, where I have my main home. Will the sale of my townhouse qualify for the primary exclusion when I move back to Umtata?

You will have to choose which of the two residences is to be regarded as your primary residence. If you choose the townhouse then the proceeds from the sale of the townhouse would qualify for the primary exclusion. However, should you later dispose of your house in Umtata, any capital gain or loss on disposal would be subject to CGT for the period that you stayed in your townhouse. This follows from the point made in the answer to question 4(a) above that a person may not claim a primary residence exclusion for more than one residence at a time (paragraph 45(3) of the Eighth Schedule).

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8. I own a flat via shares in a share block company. I reside in the flat when on holiday, and rent it out the rest of the year. What will the CGT implications be if I sell my shares in the share block company?

The capital gain made on the sale of the shares will be subject to CGT as the flat will not qualify as a primary residence.

One of the basic requirements for a flat to qualify as a primary residence is that the owner, beneficiary of a special trust, or spouse of the owner or beneficiary must ordinarily reside in the home and must use the home for domestic purposes as his or her ordinary residence.

9. I am married to three wives in terms of customary law. My wives stay in three different homes that I own. Which home is my primary residence for CGT purposes?

Following the coming into force of the recognition of Customary Marriages Act, 120 of 1998, on 15 November 2000, each of your wives is recognised as a spouse. You will have to choose which of the three residences is to be regarded as your primary residence. You should always bear in mind the point made in the answer to question 4 above that a person may not claim a primary residence exclusion for more than one residence at a time.

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10. If a salaried employee owns a house that he lives in and owns a second property that was let out, is he liable for capital gains tax on the second property which he sold? The same scenario but assume the taxpayer gives the tenant notice on the second property and then moves into the second property and lives in the second property. He then advertises the second place for sale. Is he liable for capital gains tax on the second property when he sells it? Is there a period that a person must live in a property for it to be classified as his permanent residence?

Yes

Yes, he will be liable for capital gains tax in respect of that period that he let out the residence. Assume the taxpayer let out the property from 1 October 2001 to 30 September 2002 and then lived in the residence for another two years before selling it. He will be liable to capital gains tax in respect of one third of the capital gain on the disposal of the property. There is no minimum period that a person must live in a residence to claim it as his primary residence. However, that taxpayer must be able to convince SARS that the residence is his or her ordinary residence. A word of warning. A taxpayer who buys and sells properties at short intervals runs the risk of being classified as a trader in properties in which case any profits on disposal will be taxed in full.

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11. I bought a property smaller than 2 hectares in Bantry Bay in 1980 for R98 000. We have lived in the house and maintained it with painting, etc. Also did some improvements amounting to R152 000 over the last 20 years. The current market value is R3 500 000 in today’s market. Would I be liable for CGT if I sold the property for R4 250 000 five years after valuation date?

There are three possible methods for determining the gain on this property.

Market value

Proceeds                                              R4 250 000

Market value                                         R3 500 000

Gain                                                       R   750 000

Time Apportionment Base Cost

Proceeds                                                  R4 250 000

Time apportionment base cost *         R3 450 000

Gain                                                           R   800 000

20% of Proceeds

Proceeds                                                 R4 250 000

20%                                                          R    850 000

Gain                                                          R3 400 000

You would be permitted to select any one of the three gains above and would select either the gain of R750 000 determined using the market value or the gain of R800 000 determined using the time apportionment base cost method. You would not be liable for capital gains tax on the disposal of the residence in either case, as the first R1.5 million of any gain or loss in respect of a primary residence is disregarded for capital gains tax purposes. Note that the market value method of determining the base cost will only be available to you if you valued the residence and completed the prescribed valuation form on or before 30 September 2004 and completed the prescibed valuation form. The valuation form is available on this website under CGT / Forms.

* Original cost + (Proceeds – Original cost) X Years before valuation date

Years before valuation date Years after valuation date

= 250 000 (4 250 000 – 250 000) x 20

20 5

= 250 000 4 000 000 x 20

25

= 250 000 3 200 000

= 3 450 000

Note that the number of years before valuation date in the formula above is limited to 20 years where an improvement to the property has been made before the valuation date. This compensates for the fact that the formula treats all improvements before valuation date as if they were made at the beginning of the period.  Note also that a part of a year is treated as a full year.

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12. A couple have lived on a boat (longer than 10m) for a number of years. The boat is their primary, and indeed only residence. Will they be exempt from CGT if they sell the boat or will SARS seek to tax any gain on disposal?

A boat used as a place of residence by an individual is specifically included in the definition of residence, as is a mobile home and a caravan. A boat will therefore qualify for a primary residence exclusion on the same basis as a more conventional residence.

13. Is the primary residence exclusion of R1.5 million subject to apportionment?

There has been confusion regarding this point amongst some tax consultants but in our view the law is clear. One has to first calculate the overall capital gain or loss on sale of the residence. Next you must work out what portion of that gain or loss relates to the primary residence. For example, if 10% of the residence was used as a home office, and there was a capital gain of R2 000 000, then the capital gain attributable to the primary residence is R1 800 000 (R2 000 000 x 90%) and the R1.5 million exclusion is applied in full against this figure. So R300 000 (the portion of the gain not covered by the R1.5 million exclusion) and R200 000 (the portion of the capital gain which is not in respect of a primary residence) would be subject to CGT. The only time that the R1.5 million is apportioned is when more than one person has an interest in a residence. For example, if husband and wife each own 50% of a residence then they will each only be entitled to R750 000.

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14. More than 50% of my home is used for business purposes. Do I qualify for the R1.5 million exclusion?

No – in terms of the definition of a primary residence contained in para 44 of the Eighth Schedule, a primary residence must be used mainly for domestic purposes.

1. If I own my home in a company or trust is there a way to correct the situation so that I can enjoy the primary residence exclusion?

Where your home is owned by a company (including a close corporation) or a trust, a window of opportunity has been granted to transfer the residence into your own name without incurring any adverse tax consequences.

The following criteria must be met to permit natural persons to transfer an interest in a residence from a company or trust to him or herself without fiscal disadvantage.

• The natural person must acquire the residence from that company or trust on or after the promulgation of the Taxation Laws Amendment Act 2001 (i.e. 20 June 2001), but not later than 30 September 2002.
• The natural person alone or together with his or her spouse, must directly hold all the equity share capital in that company from 5 April 2001 to the date of registration in the deeds registry of the residence in the name of that natural person or his or her spouse or in their names jointly.
• The natural person disposed of that residence to the trust by way of donation, settlement or other disposition or made all the funds available that enabled the trust to acquire the residence.
• The natural person alone or together with his or her spouse ordinarily resided in that residence and used it mainly for domestic purposes as his or her ordinary residence from 5 April 2001 to the date of registration.

·         The registration of the residence in the name of the natural person or his or her spouse or in their names jointly takes place not later than 31 March 2003.

2. If I purchased property in a trust, would I qualify for exemption from stamp duty and transfer duty if I transfer the property into my own name?

No, you would not qualify for the exemption from stamp duty and transfer duty. A number of conditions have to be met before the exemptions apply. Section 9(17) of the Transfer Duty Act stipulates that the natural person in whose name the property is to be registered must have disposed of that residence to that trust by way of donation, settlement or other similar disposition, or financed all the expenditure, that was actually incurred by the trust to acquire and to improve the residence. If a trust is purchased which owns a property, the purchaser could not meet this condition.

3. I purchased my house by taking over a trust. My wife and I became the new trustees and beneficiaries while the sellers resigned as trustees/beneficiaries. I organised the bond (in the name of the trust) and paid all affiliated costs in making the purchase. Does this arrangement meet the requirement that the individual must have originally… financed all the expenditure actually incurred by the trust to acquire and to improve the residence. Even if I do qualify for exemption from the transfer duty (were I to transfer the house into my name) I’m sure there will be some costs. What can I expect? Legal fees? Bond registration costs? It sounds too good to be true

You appear to have become involved in a scheme that purports to avoid transfer duty. SARS does not accept the validity of these schemes and is currently working on a test case in this regard.

You do not meet the requirements to qualify for the exemption, as you are not the original financier of the expenditure incurred by the trust to acquire the property.

Another exemption that may be applicable in the case of trusts is to be found in section 9(4)(b) of the Transfer Duty Act. This section provides for a transfer duty exemption where a trust is founded by a natural person for the benefit of a relative and the property is transferred to the relative. In this case, however, the exemption will not apply as the trust was not founded for a relative of the reader.

Finally, had you qualified for the exemption from transfer duty on the transfer of the property and from stamp duty on the hypothecation of the mortgage bond, you would still have been liable for conveyancer's fees, bank charges and other non-tax costs of the transfer.

4. In terms of the Act, no duty shall be payable if the person disposed of the residence to a trust by way of donation…… or financed all the expenditure……..(a) Does all the expenditure mean 100%. For example, if a third party paid for a room to be added to the property, will the section apply? (b) Please confirm that obtaining a bond or loan will be regarded as "financed all the expenditure"

a. "All the expenditure" means 100% of it and if a third person had paid for the addition of a room the section will not apply
b. In the circumstances where a bond was obtained by the trust to finance the acquisition and improvement of the residence, the person who financed the interest on the bond and the repayment thereof will be regarded as having financed that expenditure.

5. We have a property in a CC. There are two members that each have a 50/50 share and the two members are in a same sex union from May 1986. The property has been used as a primary residence for domestic purposes since March 1998. Bond expenditure was paid by the members and the size of the property is 2,3 hectares and the municipal value is about R500 000. We would like to know what the effect of CGT would be on us if we transferred the property to our individual names.

The transfer of the residence into the names of the members will be exempt from transfer duty, stamp duty and secondary tax on companies and not subject to CGT if it meets the following conditions:

·         the residence will be the primary residence of the members;

·         the residence is acquired from the CC after the promulgation of the Taxation Laws Amendment Act 2001(i.e. 20 June 2001), but not later than 30 September 2002;

·         the natural person alone or together with his spouse held the full control of the CC from 5 April 2001 to the date of registration in the deeds registry of that residence in the name of that natural person or his or her spouse or in their names jointly;

·         the natural person alone or together with his or her spouse ordinarily resided in that residence and used it mainly for domestic purposes as his or her or their ordinary residence from 5 April 2001 to the date of that registration.

·         the registration in the deeds registry in the name of that person, his or her spouse or their names jointly takes place not later than 31 March 2003.

The definition of "spouse" in relation to any person, includes a person who is the partner of such person in a same-sex union which the Commissioner is satisfied is intended to be permanent. The union is, in the absence of proof to the contrary, deemed to be a union without community of property.

When the size of the property qualifying for exclusion as a primary residence exceeds two hectares a reasonable apportionment is required, as any gain or loss attributable to the property in excess of two hectares is subject to CGT. This is irrespective of whether income is derived from the land or the fact that it cannot be used for any development. In fact, if income was derived from one hectare of the property, only 1,3 hectares would qualify for exclusion as a primary residence as the one hectare was not used for domestic or private purposes.

FAQs: Calculation of Taxable Capital Gains and Assessed Capital Losses

 If your CGT question is not dealt with in this list of FAQ's, please address your query to cgt@sars.gov.za

1. Where are taxable capital gains included in the basic reduction formula?

In terms of the revised definition of "taxable income", together with section 26A, the basic reduction formula has changed to the following:

Gross Income

- Exemptions

=Income

- Deductions

+Taxable Capital Gain

=Taxable Income

2. In the case of a couple married in community of property, will a capital gain on an investment in the name of one of the partners be regarded as a capital gain accruing to both partners? In other words, can the capital gain be spread between the two partners as is the case with interest earned? If the answer is "no", should investments which are likely to incur a capital gain when disposed of (e.g. shares or unit trusts) not be transferred to the partner who has the lower marginal tax rate?

Where a partner married in community of property disposes of an asset, the disposal is treated as having been made in equal shares by each partner. The gain or loss is therefore spread equally between the partners.

An exception to this general rule is the case where the asset was excluded from the joint estate, in which case the gain or loss is solely attributable to the partner disposing of the asset.

A partner in this situation, or perhaps a partner married out of community of property, may well be tempted to transfer the asset to the partner with the lowest marginal tax rate in order to take advantage of that rate. However, the provisions of paragraph 68 of the Eighth Schedule permit SARS to disregard that transfer if the main purpose is to reduce, postpone or avoid the payment of tax and to attribute the gain back to the partner that originally owned the asset.

3. Can an assessed loss – as opposed to an assessed capital loss - be set off against a taxable capital gain?

Yes. Some commentators have questioned this point because a taxable capital gain is included in taxable income. The definition of taxable income in s 1 provides as follows:

‘taxable income’’ means the aggregate of—

(a) the amount remaining after deducting from the income of any person all the amounts allowed under Part I of Chapter II to be deducted from or set off against such income; and

(b) all amounts to be included or deemed to be included in the taxable income of any person in terms of this Act;’

It is evident from this definition that taxable income can be a negative figure. Paragraph (a) would become negative when the amounts allowed in terms of Part I of Chapter II exceed the income of a person. Furthermore, Part I of Chapter II includes s 20 which deals with assessed losses.

The intention of the legislature can also be seen from the amendments to s 103(2) which provides that a ‘tainted’ capital gain cannot be set off against an assessed loss. These amendments would not have been necessary if a taxable capital gain could not be set off against an assessed loss.

1. What is base cost?

Base cost means the cost of an asset against which any proceeds upon disposal are compared in order to determine whether a capital gain or loss has been realised.

Base cost includes those costs actually incurred in acquiring, enhancing or disposing of a capital asset that are not allowable as a deduction from income.

The following are included in the base cost of an asset:

• Acquisition cost
  Those costs actually incurred in acquiring an asset. If the asset is one that you created yourself, for example, the goodwill of a business, any capital expenditure actually incurred in creating the asset may form part of the base cost, to the extent that the expenditure has not been claimed for normal income tax purposes.
• Incidental costs of acquisition and disposal
  Any of the following costs actually incurred as expenditure directly related to the acquisition or disposal of an asset:
• The remuneration of a surveyor, auctioneer, accountant, broker, agent, consultant or legal advisor, for services rendered
• Transfer costs
• Stamp duty or similar duty
• Advertising costs to find a seller or to find a buyer
• Any amount of VAT not allowed as an input deduction or where an equivalent tax is levied by a foreign state, not allowed as an input deduction by that state. 
• The cost of moving that asset from one location to another
• If that asset was acquired or disposed of by the exercise of an option, any consideration given by that person for the granting of that option.
• The cost of installation of the asset.
• Donations tax paid in certain circumstances.
• Capital costs of maintaining title or right to an asset
  These costs would include, for instance, legal costs actually incurred in respect of a court dispute relating to maintaining your right or title to an asset you own.
• Cost of improvements or enhancements
  The improvement or enhancement must still be reflected in the asset’s state or nature at the time of its disposal.
  Valuation date value of an option
  Cost of ownership of assets used exclusively for business purposes, listed shares and units in a unit trust scheme
• These cost would include the cost of maintaining, repairing and protecting the asset, rates and taxes and interest. In the case of shares and units only one third of the expenditure is allowed.

Certain amounts that have been included in the person's income and amounts arising as a result of value shifting arrangements.

And what about current costs such as interest, repairs, insurance and rates and taxes? They are normally allowed as deductions from income or are incurred for personal use and are not allowed as part of base cost.

2. What if an asset was acquired before the valuation date?

Where an asset was acquired before the valuation date and disposed of thereafter, CGT will only be payable on the capital gain attributable to the period after the valuation date. In other words, any gain attributable to the pre-valuation date period is not subject to CGT. The gain attributable to the period of ownership of an asset before the valuation date is excluded from CGT by valuing the asset on valuation date or by adopting time-apportionment base cost

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. What’s not affected by the CGT?

• The residence wherein you ordinarily reside (except for that part of a gain or loss exceeding R1.5 million).
• Capital gains on the sale of your private motor vehicle, including a motor vehicle in respect of which you receive a travel allowance.
• Your personal-use assets such as clothes, jewellery, stamps, art works, antiques, collectible coins and other personal effects

A personal-use asset is an asset of a natural person or a special trust, to the extent that that asset is used for purposes other than the carrying on of a trade. However, it excludes the following:
a. A coin of which the intrinsic value is mainly attributable to the material from which it has been minted or cast
b .Immovable property
c. An aircraft, the empty mass of which exceeds 450kg
d. A boat exceeding 10m in length
e. A financial instrument of whatever nature
f. Any fiduciary, usufructuary or other like interest, and
g. A right or interest of whatever nature to or in an asset envisaged in the items above.

Lump sums from your pension, provident or retirement annuity funds

• Lump sums from long term insurance policies received by the original beneficial owner, spouse, nominee or dependants provided they do not pay the original owner for the cession of the policy. (Payments from second-hand policies do not qualify)
• Compensation for injury, illness or defamation.
• Your winnings on the national lottery, the horses or the casino.
• Any gain you make when you exchange foreign currency for Rands when you return from an overseas trip.
• Donations and bequests to public benefit organisations.
• Capital gains of exempt organisations
• A gain up to R750 000 on the sale of the assets of your small business when you retire.
• Capital gains arising from claims made in terms of the Restitution of Land Rights Act.

2. How does the annual exclusion work in respect of a capital gain or capital loss situation?

It reduces the capital gain or capital loss

Eg:

Other points to note regarding the annual exclusion:

·         It applies only to individuals and special trusts. Companies, close corporations and trusts are not entitled to the annual exclusion.

·         It is not cumulative. In other words, it does not reduce an assessed capital loss each year nor can it be accumulated if there are no capital gains in a particular year. It is limited to the amount of the capital gain or loss in a year.

·         It is not apportioned for periods of less than a year. In other words you qualify for the full R15 000 even if the year of assessment is less than a year (for example in the year a person dies).

·         In the year that a person dies the annual exclusion is R120 000.

3. Is the annual exclusion applied to reduce an assessed capital loss brought forward each year?

No. A person's annual exclusion is deducted from the sum of his/her capital gains and capital losses during a year of assessment. The resulting figure is known as an aggregate capital gain or aggregate capital loss.

Should the sum of those capital gains and losses be less than R15 000, the annual exclusion is limited to that amount. For example, if a person has no capital gains or losses during a year of assessment, the annual exclusion is nil.

Any assessed capital loss brought forward is set off against the aggregate capital gain or loss and is not affected by the annual exclusion

Companies, CC's and Trusts

Property transfer from a Company, CC or Trust into the name of an individual

By cheriepower

Non Residents

There are various issues involved in purchasing immovable property in a foreign country which extend beyond the mere signing of contracts and documents and paying of money of which the aver-age non-resident interested in purchasing property is unaware, or would like to know, but is perhaps unsure who to ask.

To this end, we have put together a selection of questions frequently asked by non-residents that we trust will assist in clarifying these issues. In order to obtain a comprehensive idea of the processes involved in buying and selling property in South Africa, this brochure should be read in conjunction with our brochures Buying Property in South Africa and The Complete Guide to Buying and Selling Property in South Africa.

Are there any restrictions on non-residents buying property in South Africa?

The answer to this is a resounding NO, save for a prohibition on illegal aliens owning immovable property in South Africa. Non-residents will of course be subject to the same laws and regulations as South Africans and it is compliance with these that ensure the efficiency of the S.A. land registration system and security of tenure.

Should the non-resident not wish to purchase the property in his or her own name but rather in the name of an entity, such an entity must be locally registered and meet the requirements inherent in

registration of the chosen entity, such as those contained in the Companies Act. For example, the non-resident may decide to own the property through share ownership in a company, membership in a close corporation (unique to South Africa) or as a beneficiary in a trust. In the event of a non-resident acquiring property in the name of an entity, funds brought into the country will represent a loan to the local entity and will require Exchange Control approval.

For the most part however, property is registered in the name of the purchaser as an individual. There may be specific reasons for taking transfer in the name of an entity and for a brief overview of these, kindly consult our Purchaser Guide to Alternate Entities for Acquiring Ownership Of Immovable Property.

Note that purchasers, will have to finalize their choice of vehicle for purchasing the property prior to signing any Offer to Purchase or Agreement of Sale, as no changes can be made at a later date without the possibility of penalties being imposed and resultant delays in the transaction.

Finally, a non-resident can purchase South African property over the internet without entering the country. However, should the prospective purchaser intend residing in the property for any length of time, he or she will need to comply with the requirements of the Immigration Act and either have a valid permit to temporarily remain in the country or be in possession of a permanent residency permit.

How can foreign funds be brought into SA for a property acquisition?

Foreign funds can be paid into any nominated bank account in South Africa. This account will usually be the trust account of the estate agent or transferring attorneys into which the deposit for the property and the balance of the purchase price is paid. These funds will be invested for the non-residential benefit and the non-resident can rest assured that such a transfer is secure and guaranteed, as the operation of these trust accounts is regulated by the professional boards overseeing the operations of both attorneys and estate agents.

When a non-resident transfers funds from a foreign source into a South African bank account, a record known as a “deal receipt� is kept of the foreign funds received by the South African bank. This is an important document which must be retained for purposes of repatriation of the funds.

Can money be borrowed in SA to purchase property?

The South African Reserve Bank will adjudge all for-eigners not having their domicile in South Africa as non-residents. This however does not include foreign¬ers with South African work permits who will be con¬sidered to be residents for the duration of their work permit. What this means is that non-residents are restricted in their borrowing ratio to 50% of the pur¬chase price, while the remaining 50% must be brought into the country in cash from a foreign bank. In order to qualify for a South African mortgage bond, the non-resident will need to provide proof of earnings and comply with the Financial Intelligence Centre Act, which, in simple terms, pertains to identification of the non-resident for money laundering purposes, and involves the production of certain documents such as a passport and proof of residential address.

Can a non-resident open a bank account at a South African banking institution?

In order for a non-resident to service repayments on a mortgage bond, he or she will need to open a non-resident banking account which can either be done from abroad or from within the country. Again, certain documentation relating to the applicant’s identity will be required, i.e. application form detailing name, passport number and address, certified copies of the relevant pages of the passport, and proof of source of income, such as a salary slip or pension statement. All copies will have to be originally certified. Once the bank account has been opened, foreign funds will have to be deposited immediately.

In certain circumstances, local currency can be deposited into the account, for example, rental

income acquired from property belonging to the non¬resident. This is dependent on the bank being in possession of a certified copy of the rental agreement. Obviously the rand value received on the sale of immovable property in South Africa can also be receipted into the non-resident account provided the necessary documentation is lodged prior to the deposit being made.

Who chooses which attorneys will attend to the transfer and whose interests are the attorneys protecting?

It is customary in South Africa for the seller of immovable property to nominate the attorneys who will attend to the transfer. Such attorneys then act for the seller and on his or her instructions. Consequently, in the event of a dispute between the seller and purchaser, the purchaser would have to seek independent legal advice. Note that whilst the seller selects the attorneys, the purchaser pays the transfer costs.

Can transfer and bond documents be signed overseas and if so, what is the procedure?

Yes. However, there are certain formalities that must be complied with. Documents can either be signed before a Notary Public or at the South African Embassy in that country, but this can be costly and time consuming. If a seller or purchaser is in South Africa at the time of the transaction but returning overseas shortly thereafter, it is advisable if at all possible to sign a special or general power of attorney in favor of a local friend or family member who will then be able to act on their behalf.

Other than the purchase price, are there any other costs for which the purchaser will be liable?

Yes. The purchaser is usually liable for the following costs:

• transfer duty, which is a tax levied on property and based on the purchase price, (this is not payable if the seller is   VAT  registered);
• transfer fees;
• Deeds Office levies, pro-rata rates and taxes/ sectional title levies;
• the cost of obtaining a rates/levy clearance certificate.

Most of these costs are determined according to the purchase price of the property.

Further costs, including the attorney fees and bank charges such as the initiation and valuation fee, will be incurred if the purchaser registers a mortgage bond.

Once the purchaser takes transfer of the property or assumes the risk therein, he or she will be liable for all costs and associated risks. If the property is not bonded, it is in the purchasers best interests to obtain insurance. This is compulsory if the property is bonded and is normally arranged by the bank concerned.

On sale of the property, can the money be taken out the country?

Understandably, this is without doubt the number one concern of non-residents considering investing in South Africa. The answer to this question is simply, yes. Money from a foreign source together with any profit, proportionate to that non-residents share holding in the property, may be repatriated in due course in terms of S.A. Exchange Control Regulations. If the non-resident owns property together with a S.A. resident, only his portion may be repatriated.

On transfer of the property to the non-resident purchaser, the title deed will be endorsed non-resident and /or a deal receipt retained by the banking institution when the foreign funds were originally introduced into the country. This facilitates the repatriation of the funds and profit on sale of the property, provided the bankers are satisfied that such profit is reasonable and market related. Obviously if the purchase was partially financed by funds borrowed in South Africa, that portion of the purchase price cannot be repatriated unless the bond has been settled in full.

Furthermore, if a foreigner takes up permanent residency in South Africa and signs a Declaration and Undertaking at a South African bank (namely declaring whether they are in possession of foreign funds and undertaking not to place same at the disposal of anyone resident in the Republic), they will be considered a resident for Exchange Control purposes and accordingly will only able to repatriate funds within five years of their immigration. Thereafter they will be considered to be a South African citizen and subject to the same regulations and limitations.

Finally, the repatriation of funds will be subject to capital gains tax and this will be discussed more fully in due course.

Is a non-resident, liable for payment of any South African income tax?

While South Africans are taxed on their worldwide income, non-residents are liable for income tax only on income accruing from a South African source. For example, if the property is rented, the rental income will be subject to South African income tax.

On disposal of the property, the non-resident will be liable for payment of capital gains tax. For property registered in the name of an individual, 25% of the profit will be taxed at the individual marginal income tax rate. The maximum marginal rate is currently 40%, which translates to a maximum flat rate payable of 10% of the capital gain.

Until recently, non-resident sellers were obliged to register as taxpayers in the year of disposal of their immovable property in South Africa. However, this was not being done and the SARS were not able to collect tax that was due and payable. Accordingly, measures have been introduced which will tighten the tax collection net considerably. In terms of new proposals to the capital gains tax legislation, an obligation will be imposed on any purchaser of property from a non-resident for a price exceeding R2 million

to retain a percentage of the purchase price and to pay it over to SARS within 10 days of the date of transfer of the property. The amounts that will have to be retained are:

5% if the seller is a non-resident individual

7.5% if the seller is a non-resident company

10% if the seller is a non-resident trust.

This payment will form an advance collection against the non-resident income tax liability for the year of assessment in which the property is sold.

Finally, it is important to note that a non-resident who has not permanently immigrated to South Africa will be considered a resident for income tax purposes if he or she spends more than a certain length of time within the country.