What you should know about capital gains tax as a South African tax-payer?
The absence of a CGT can cause many distortions in an economy by encouraging taxpayers to convert otherwise taxable income to tax-free capital gains. South African Revenue Service observed that sophisticated taxpayers had engaged in conversion transactions before, which eroded the individual and corporate income tax bases. This erosion decreases efficiency and equity in the overall tax system. CGT is therefore a crucial element in any income tax system because it protects the integrity of personal and corporate income tax bases. It can also materially aid in tax morality.
CGT’s impact on investment, domestically and abroad, has been discussed since the Franzsen Commission was established in 1969. While some commentators have raised concerns about the impact of CGT on capital formation and risk-taking as well as investment preferences, it is important to remember that CGT has been widely accepted worldwide.
General rule and CGT value
CGT will apply to capital gains and losses on disposals of capital assets unless otherwise provided. CGT will not apply to capital gains or losses that were acquired prior to the effective date. However, the tax will be payable only on capital gains accrued after this date. In all cases, the tax payable will be reduced by including only a portion of the gain in taxable income.
CGT in South Africa is not fixed and varies from person to person. CGT is a percentage of your capital gain that’s added to your income for the tax year. You are taxed according to your tax bracket (your total earnings for that tax period). The CGT rate can vary from 7.2% up to 18% depending upon which tax bracket you are in.
What are the affected capital assets?
Capital assets affected are any property, whether movable or immovable. This excludes trading stock and mining assets which are eligible for an income tax deduction as capital expenses. All assets, regardless of their nature, are subject to CGT, except for the few exclusions.
The matter is a cause for one of the most frequent confusions among South African Forex traders – whether or not Forex incomes are taxed in South Africa. According to the detailed IQ Option review, more than half of its South African clients are not aware that they do have to pay taxes on Forex incomes. However, it is indeed unclear whether you file it under the personal income or capital gains due to the non-standard nature of Forex trading compared to stocks and other long-term assets.
CGT is applicable to all assets, except those specifically exempted, including land, mineral rights, and office blocks, as well as motor vehicles, boats and caravans, trademarks and goodwill, shares, and KrugerRands.
Who is eligible for CGT?
Any natural person (individual or legal) who is a resident of the South African Republic. This definition will be used for the purposes of the switch to the residence base of taxation in relation to capital assets held in the Republic or outside the Republic.
If a natural person or legal person isn’t a resident of the Republic, then liability for CGT will be incurred if a CGT Event (disposal) or a deemed disposition occurs with respect to:
Immovable property, including mineral rights, or interests in immovable properties located in the Republic. Land held either directly or through a “closely-held” entity, for example. Closely held is when the entity is controlled only by a few shareholders or members. Assets of any permanent establishment or fixed base, branch, or agency in the Republic that are used to trade practice or vocation.
This is consistent with international practice. Most countries that operate a CGT regime do not tax capital gains of foreigners on immovable property or assets used in trading activities. This is consistent with South Africa’s agreements to avoid double taxation with other countries.
What prompts CGT?
CGT will be activated upon the occurrence of a CGT. A CGT event, as the name suggests, is when there is a disposal or deemed disposition. An asset can be acquired or disposed of whenever the asset’s ownership changes. An asset can be disposed of if it is:
- Given away
- Exchanging, for instance, a share-swap
- If it is redeemed, or canceled.
There are a number of rules that will consider disposal to have taken place. These include the following:
- A natural person (a person) or legal person (an entity) is no longer resident in the Republic.
- If the ownership of an asset is not transferred but it is for all intents & purposes disposed of, Certain value shifting and derivative transactions are examples.
- If the trust’s beneficial interest changes
CGT is a transaction-based income tax in which realized or deemed realized capital losses or gains are taken into account annually by way of the normal income tax return.
In the event of a deemed disposition, no special arrangements for CGT payment are made. CGT is part of the income tax system so taxpayers have ample time between the date of deemed disposal and the submission of tax returns and final assessment to make necessary arrangements. As with normal income tax, a taxpayer can approach SARS to negotiate the terms of repayment and the interest rate.
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