Capital gains tax (CGT) will have been in effect for four years next month, and people are starting to feel the effects of the tax on their profits.
”In the first few years asset prices had not risen that much, but now we are seeing a boom in both the property market and the share market and the capital gains are much higher,” says Tony Barrett, regional manager at BJM Private Client Services.
When CGT came into effect in October 2001, share prices were languishing after the 9/11 attacks. But after four years the FTSE/JSE All Share index is up nearly 100%, so most people would have doubled their money in the share market. But there is little one can add to the base cost other than brokerage, which means the full profit is subject to CGT. However, Barrett warns that it is not advisable to allow one’s investment decision to be driven by tax concerns. ”Rather pay tax as a result of having made a healthy profit than pay no tax on a loss. To hold on to a share that you should be selling, out of fear of paying tax, would not be wise.”
Property has also seen a spectacular growth rate over the past four years but, when it comes to CGT, there are more breaks. Your primary residency has a CGT exemption on the first R1-million of profit. Then you can add home improvements –uch as electric fencing, garage doors or painting — to your base cost, as well as estate agent fees and transfer costs. Be aware, though, it is possible that, with property prices rising so rapidly, you could have made more than R1-million profit after base costs.
Barrett says, for example, a home with a base cost of R1-million, which is now sold for R2,5-million (R1,5 million profit) would only attract CGT on R500 000. CGT is paid on 25% of the profit, which is added to the seller’s income. Therefore, in this case, R125 000 would be added to the seller’s marginal tax rate. If the seller pays 40% tax, they would pay a total of R50 000 to the Receiver of Revenue. ”When you consider that you have made a total profit of R1,5-million over four years, R50 000 is not much to pay in,” says Barrett.
Barrett says the real problem is with houses held in companies or trusts. The same house held in a company structure would not qualify for the R1-million rebate, and a company would pay CGT on 50% of the profit, which is then added to its 29% company tax rate. The seller now pays R217 000 in tax. ”If you want to pay out the remaining profit you will also be hit with secondary tax on companies of 12,5%.”
People who hold properties in trusts are also burnt by CGT, which is levied at 50% of the profit. A trust also carries a 40% flat tax rate. However, Barrett says a trust does have the flexibility to transfer the proceeds to the beneficiaries who then, in turn, pay the CGT. Although their marginal tax rate may be 40% they will only pay CGT on 25% of the profit –nd there is no tax charged on the distribution, unlike with the company structure.