A Laymans overview & When to Value

On what is capital gains tax paid?

Capital Gains Tax became effective on 1st October 2001. The general public, from the home owner to the large institutions, needed to seriously have review their portfolios which could effectively meant the collapsing of existing investment structures so as to ensure a well balanced portfolio.

“Capital gains tax (CGT) is not a separate tax but forms part of income tax. A capital gain arises when you dispose of an asset on or after 1 October 2001 for proceeds that exceed its base cost.

The relevant legislation is contained in the Eighth Schedule to the Income Tax Act 58 of 1962.

Capital gains are taxed at a lower effective tax rate than ordinary income. Pre- 1 October 2001 CGT capital gains and losses are not taken into account. Not all assets attract CGT and certain capital gains and losses are disregarded.

A withholding tax applies to non-resident sellers of immovable property (section 35A). The amount withheld by the buyer serves as an advance payment towards the seller’s final income tax liability.“  Source: https://www.sars.gov.za/types-of-tax/capital-gains-tax/

The disposal of an asset, triggers CGT and the tax is then calculated on the amount by which the  proceeds on disposal of the asset exceed the base cost. Taxpayers had until 30 September 2004 to have their properties valued. These valuations should have been performed on the basis of the value of the property on valuation date, 1 October 2001. The prescribed valuation form CGT 2L must be completed and signed. This form can be downloaded from the SARS website (see Capital Gains Tax or Forms). On the retention and submission requirements (Source: www.sars.gov.za)

Some salient features with which to acquaint yourselves regarding the submission of the valuations are:-

Market Value

This can only be used if a valuation is completed by 30th September 2004 (If you did not have a valuation, you cannot present one to SARS after that date). The valuation must be submitted with the tax return covering the period when the property is sold.

In these  certain circumstances, the valuation must be submitted with the first income tax return after 30th September 2003 (regardless of the year to which the return relates) if market value of the property exceeds R 10 million.

Base Cost

The Base Cost is the actual amount spent on acquiring the asset and includes the cost of acquisition or disposal, creation costs, certain professional fees including those costs of a professional valuer, legal adviser, transfer costs, transfer duty, advertising costs, option costs etc. In addition, costs of improvements and enhancements are allowed. The normal running expenses deducted for income tax purposes will not qualify as part of the base cost in determining the gain liable for CGT. Essentially, the base cost will be deducted from the proceeds on disposable of the asset in the future in order to calculate the tax.

Property acquired before the introduction of CGT becomes more complex than would otherwise be the case. In such a case, the base cost is the value of the asset on 1 October 2001 plus certain expenses incurred thereafter.

20% RULE  Simply based on 20% of the market value of the Property.

Capital gains tax is payable on the profits realised upon the sale of “assets” which include:-

• Your holiday home or other property owned by you
• Shares that you own or the sale of your interest in a property owning company or close corporation
• Unit Trusts, Kruger Rands. Boats, Aircrafts etc.

Consult your Accountant or Taxation Practioner for further details relating to Taxation queries whereas we can assist with valuations required during this time.

How is capital gains on property calculated?

There are three methods of which any one may be used, on any specific property (asset):-

• The Market value as at 1 October 2001 or
• A time-based apportionment; or
• 20% of disposal proceeds (this method is likely to be rarely used and possibly only when the market value has not been established or there are insufficient records that exist).

If you choose the market valuation method and you do not have a valuation, then you cannot use this method of valuation at a later stage.

The legislation defines Market value, …” the price which could have been obtained upon a sale of the asset between a willing buyer and a willing seller dealing at arm’s length in an open market” . Please note that the legislation does make reference to value of Unit Trust, shares and other assets. The valuation is determined on the effective date being 1 October 2001.

Simply using the MARKET DATA APPROACH METHOD based on a  property purchased in October 1991 for R 100 000 and sold in October 2006. The market value as at 1 October 2001 is R 650 000.  Profit R 550 000 on which CGT is calculated.  Also see the following example .

Example

Using TIME APPORTIONED METHOD effectively eliminates the profit or loss arising or incurred prior to October 2001 by apportioning the loss or profit over the holding period (using a straight line pro rata basis), and thus effectively only taxing the amount attributable to the period beyond 1 October 2001.

Whether the valuation is performed by the taxpayer alone or with assistance of an expert, it must be properly documented and must indicate in detail how the market value was arrived at. These details should include the description of the asset being valued, as well as the factors and assumptions that were taken into account in arriving at the market value.
In the final analysis, the valuation should be capable of standing up to scrutiny by SARS and, if necessary, a court.

See: 
https://www.sars.gov.za/types-of-tax/capital-gains-tax/market-values-published-on-1-october-2001/