1. What’s the difference between CGT and income tax?
CGT is a 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 can apply to shares, unit trusts, property, crypto currency and the sale of privately-owned businesses.
2. Why do I have to pay CGT?
Taking their lead from countries around the world, South African authorities introduced CGT in 2001 as a means of broadening the tax base. Before CGT was introduced, salaried employees shouldered the vast majority of the country’s tax burden – a situation which was clearly unfair. CGT also ensures that affluent citizens who buy and sell assets should pay more tax – once again, a good thing in a country as unequal as South Africa.
3. How can I avoid CGT?
The only surefire way to avoid CGT is to invest in a retirement fund, such as a retirement annuity, provident fund, pension fund or tax-free savings account. CGT does not apply to any of these investment types. It’s impossible to avoid CGT by hanging onto an investment. When you die, the law deems that your investments have been sold, and CGT kicks in for your heirs.
4 . But aren’t some gains exempt from CGT?Yes! Notable exemptions include:
- R2 million CGT exemption on the sale of your primary residence.
- Annual R40 000 exemption that applies to all capital gains within a tax year. You can sell investments with combined profits totalling R40 000, without having to pay CGT.
- R1.8 million once-off exemption for individuals selling small businesses (valued under R 10 million).
- CGT does not apply to the sale of personal items (cars, art, jewellery, small boats, light aircraft…), donations to approved benefit organisations, and proceeds from a life policy.
- Non-residents only pay CGT on the sale of immovable property and shares in property companies.
- Payments in respect of original long-term insurance policies.
5. What if I sell a home that’s jointly owned?
In this case, both parties need to declare the total gain to SARS. 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.
6. What if my primary residence is owned by a trust?
The primary residence exclusion of R2 million doesn’t apply to trusts. In fact, the effective CGT rate for trusts can be double what it is for individuals! If the trust happens to be a special trust – for a person with a disability or similar – then individual tax rates apply.
7. When do provisional taxpayers pay CGT?
If you’re a provisional taxpayer, when you submit your first provisional tax return, you should include the taxable portion of any capital gains in your income estimate.
8. 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 much higher than CGT).
There’s a lot of confusion regarding the taxation of crypto currency. When selling crypto assets, the main aspect to consider from a tax perspective is intention. If the intention was to make a profit, it’s likely that income tax rules will be applied, and you’ll be taxed according to your tax bracket. If, on the other hand, you bought the crypto to create a long-term store of wealth then CGT should apply. The difference can be massive: income tax might be as much as 45%, whereas capital gains tax will max out at 18%. So please consult with an expert before betting the house on crypto.
9. What happens if my 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.
10 . What happens when I pass away?
The only way around CGT is to invest in a retirement fund, because when you die you are deemed to have sold any investments held. CGT does, however, roll over until your spouse passes away. After death, there’s a R300 000 exemption on CGT.
The bottom line
While minimising tax is an important part of the financial planning process, 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 your financial planner.
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 your professional adviser for specific and detailed advice.