Capital Gains Tax Explained:

Base Cost

What is base cost?

Base cost is the amount against which any proceeds upon disposal are compared in order to determine whether a capital gain or loss has been realised.

Property [Capital Growth] Base cost

The capital gain = selling price – the base cost.

Where the Base cost includes original cost + transfer duty + transfer fees + bond registration fees + improvements + selling cost

And selling cost includes estate agent’s commission + bond cancellation fee + certificates of compliance (for example electrical, beetle, plumbing, gas and electrical fence compliance certificates), etc.

Improvement cost includes all additions over the years such as alterations, improvements, alarm system, new plants, paving, etc.

In addition, should you decide to put your property on the market and aim for a higher selling price by doing repairs and painting before selling, SARS allow for these costs to be deducted as improvements. Source: Fanus Jonck, Chris Green, SARS website.

Capital Gains Tax Explained

When investing in a unit trust or share portfolio there are generally two types of returns an investor can expect to earn, i.e. income and capital growth.  Income earned can be received in the form of interest and dividends from unit trust funds or shares.

Tax treatment of Interest and Dividends

Interest and dividends may be paid out or re-invested in the unit trust fund.  Dividends and interest held in an investment account on a platform, such as Glacier, are re-invested and as a result, increase the number of units held by the investor.  The taxability of these income payments is, however, treated differently. Interest earned is included in an investor’s gross income for a particular tax year after which income tax is deducted.  
Dividends, however, do not get included in an investor’s gross income.  Instead, dividends are subject to a withholding tax. Dividend withholding tax (DWT) is levied at 15% on the dividends earned by an investor.  DWT is a tax levied by regulated intermediaries such as Glacier and does not form part of the investor’s personal tax return.

Tax treatment of Capital Growth

Capital growth (gains), on the other hand, is taxed very differently to income earned by an investor.  Capital growth (gains) is typically defined as the movement in price of an asset over a particular period of time (also referred to as market movement).  As the price of an asset increases, so does the capital appreciation of the asset which in this case may be a unit trust fund or a share for example.  
Capital gains tax (CGT) is levied on the capital growth (gains) which an investor has earned when he disposes of the asset.  This means whenever units/shares are sold, either to be re-invested or withdrawn, a capital gains event will be triggered.  Natural persons and some special trusts are eligible for a CGT exemption of R40 000 per year which reduces the impact of the potential tax payable by the investor.  Any gain over R40 000 will therefore be used to calculate the investor’s tax liability upon disposal. Thereafter, 40% of the capital gain will be included in the client’s gross income and taxed at his/her marginal rate.

Important things to note regarding Capital gains tax and your investment:

  • A Capital Gain is not realised when switching between different fund classes.
  • A Capital Gain is not realised when transferring units of the same fund and class to another platform.
  • A Capital Gains event is triggered when an investment is transferred between different entities (natural person and trust for an example)
  • Capital Gains Tax is not applicable to retirement funds such as a Retirement Annuity, Preservation Fund or Investment-Linked Living Annuity.
  • Capital gains are realised upon death. The CGT exemption upon death increases to R300 000.
  • A Capital Gain does not realise when an investment is transferred to a spouse. The CGT will roll-over to your spouse at the same base cost.
  • A Capital Gains Tax event is triggered when an investor transfers an existing investment into an Endowment/Sinking Fund.

Source: Glacier Financial Solutions (Pty) Ltd a member of the Sanlam Group - Ryno Oosthuizen, Business Development Manager.