Methods for calculating Capital Gains Tax
Category Calculating Capital Gains Tax
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
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”
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:
Article by David Campbell
Author: David Campbell