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METHODS FOR CALCULATING CAPITAL GAINS TAX:
This article serves as a follow up to our comprehensive guide to Capital Gains Tax published on 21 September and aims to deal in details with the methods available to a taxpayer in calculating Capital Gains Tax.
If a gain is made on the disposal of immovable property, then a tax is levied against such gain. When identifying the appropriate method for calculating Capital Gains Tax in a specific situation, regard must be had to the date on which the property was acquired by the Seller thereof, as this will have implications on such calculation.
1. Dealing with properties acquired after 1 October 2001:
1.1 The first method of calculating Capital Gains Tax is what is referred to as the “normal method”:
In terms of the normal method, the capital gains tax is calculated on the difference between the:
a. Base cost of the property; and
b. The price for which the property is eventually sold.
Paragraph 20 of the Eighth Schedule to the Income Tax Act sets out the qualifying expenditure that may form part of the base cost of an asset. In terms of this paragraph, the following amounts can be taken into account when determining the base cost of immovable property:
1. General Acquisition or disposal costs, including:
1.1 Acquisition or creation cost;
1.2 Valuation cost (only where the property was valued for CGT purposes);
1.3 Direct cost of acquisition or disposal of the property, including:
1.3.1 Remuneration for services rendered by a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal advisor;
1.3.2 Transfer Costs (including the cost of a certificate for electrical installation, but excluding any cost of repairs necessitated by such inspection);
1.3.3 Transfer Duty;
1.3.4 Advertising cost to find a seller or buyer; and
1.3.5 Sale commission;
1.4 The cost of improvements or enhancement to the value of the property
Example of the “normal method” of calculating Capital Gains Tax
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FACTS:
Paul purchased a property on 5 November 2005 for a purchase price of R1 000 000.00. Since acquiring the property, Paul spent R50 000.00 on building a pool and a further R10 000.00 on fixing the roof. Paul subsequently sold the property on 10 April 2017 for the price of R1 500 000.00. In terms of the Agreement of Sale, the Estate Agent is entitled to R75 000.00 commission on the sale.
CALCULATION:
Base Cost:
Included in the base cost of the property is the following amounts:
1. R1 000 000.00 – being the acquisition cost;
2. R50 000.00 – being the cost of improving the property by installing a pool; and
3. R75 000.00 – being the estate agent’s commission payable.
Note that the R10 000.00 spent on the roof is not regarding as being an improvement, but a repair and is therefore not including in the calculation of the base cost
Amount on which capital gains tax calculated:
As the property was acquired after 1 October 2001, the calculation of the amount on which the capital gains tax is to be calculated is determined by deducting the base cost from the selling cost:
R1 500 000.00 – R1 125 000.00
= R375 000.00
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2. Dealing with properties acquired before 1 October 2001:
Property owners have two possible methods to determine the amount on which the Capital Gains Tax will be calculated if they acquired the property before 1 October 2001.
2.1 The “time apportionment method”:
The first step in applying the time apportionment method is that the taxpayer will follow the normal method as set out above to determine the net capital gain on which Capital Gains Tax is to be calculated. A pro-rating of the net capital gain must then take place according to the number of years for which the property was held after the 1st of October 2001 in relation to the number of years in respect of which the property was owned prior to the 1st of October 2001 (subject to a maximum of 20 years prior to the 1st of October being taken into account).
Example of the “time apportionment method”
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FACTS:
Paul purchased a property on 5 November 1998 for a purchase price of R1 000 000.00. Since acquiring the property, Paul spent R50 000.00 on building a pool and a further R10 000.00 on fixing the roof. Paul subsequently sold the property on 10 April 2017 for the price of R1 500 000.00. In terms of the Agreement of Sale, the Estate Agent is entitled to R75 000.00 commission on the sale.
CALCULATION:
Base Cost:
Included in the base cost of the property is the following amounts:
1. R1 000 000.00 – being the acquisition cost;
2. R50 000.00 – being the cost of improving the property by installing a pool; and
3. R75 000.00 – being the estate agent’s commission payable.
Note that the R10 000.00 spent on the roof is not regarding as being an improvement, but a repair and is therefore not including in the calculation of the base cost
Net Capital Gain on which Capital Gains Tax is to be calculated:
R1 500 000.00 – R1 125 000.00
= R375 000.00
BUT because the property was acquired before 1 October 2001, there must now be a pro-rating between the number of years for which the property was held after the 1st of October 2001 (16 years) in relation to the number of years in respect of which the property was owned prior to the 1st of October 2001 (4 years).
The formula to determine this is as follows:
(period held after 1 October 2001) x Net Capital Gain
___________________________________________
Total number of years held
THEREFORE the taxable portion of the capital gain is:
16 x R375 000.00
______________
20
= R300 000.00
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2.2 The “valuation method”:
Under the valuation method, Capital Gains Tax will be calculated on the difference between the price for which the property is sold and the value of the property as at the 1st of October 2001 (as determined by a valid valuation) together with any qualifying expenditure that has been incurred after the 1st of October 2001. In order for the valuation method to be applicable, the owner of the property must have:
a. Acquired the property prior to 1 October 2001; and
b. Obtained a valuation of the property before the 30th of September 2004.
The valuation referred to above will be regarded as being valid if it was obtained from a sworn valuer, an estate agent or, in the case of a commercial property, the rental received can serve as the basis for calculating the value of the property.
Example of the valuation method:
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FACTS:
Paul purchased a property on 5 November 1998 for a purchase price of R1 000 000.00. On 3 September 2002 Paul requested that an Estate Agent provide him with a valuation of the property, which confirmed that the value thereof is R1 100 000.00. On 3 December 2000, Paul spent R50 000.00 on building a pool. On 3 April 2014, Paul built a Granny Flat on the property which cost him R200 000.00. Paul subsequently sold the property on 10 April 2017 for the price of R1 500 000.00. In terms of the Agreement of Sale, the Estate Agent is entitled to R75 000.00 commission on the sale.
CALCULATION:
Base Cost:
Included in the base cost of the property is the following amounts:
1. R1 100 000.00 – being the valuation;
2. R200 000.00 – being the cost of improving the property by building the granny flat; and
3. R75 000.00 – being the estate agent’s commission payable.
Note that the cost of building the pool is not included in the calculation as it was done before 1 October 2001 and would therefore have been taken into account when the valuation was obtained.
Amount on which capital gains tax calculated:
R1 500 000.00 – R1 375 000.00
= R125 000.00
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Article by David Campbell
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