Capital Gains Tax (CGT) is a tax on the profit you make when you sell something for more than what you paid for it. This tax applies to the sale of various assets like property, shares, or even vehicles.
How Capital Gains Tax (CGT) Works:
CGT is only applicable to the profit (gain) you make on the amount that is higher than the price you paid (base cost) for an asset, not the entire sale amount.
For example:
If you buy a car for R100,000 and later sell it for R130,000, your capital gain is R30,000. The R30,000 is the portion of the transaction that is subject to CGT, not the full R130,000.
Tax Rates on Capital Gains:
In South Africa, the tax rate on capital gains depends on whether you are an individual, a company, or a trust.
For Individuals:
40% of the capital gain is included in your taxable income and taxed according to the tax bracket (marginal tax rate) that will apply to this level of income.
While you may hear that capital gains tax is 18%, you could very well pay less than this as the 18% is based on the highest marginal tax rate of 45% (40% of gain x 45% tax rate = 18%).
The tax you will pay will be based on the marginal tax rate that will apply to the gain and can range from as low as 18% (40% x 18% = 7.2%) to as high as 45% (40% x 45% = 18%).
The marginal tax rate percentage that will apply to your gain is dependent on how much other income you have.
For Companies (or Close Corporations):
Companies are taxed differently. For CGT purposes, 80% of the capital gain is included in the company’s taxable income and then taxed at the corporate tax rate of 27%.
This means that the effective CGT rate for a company is 21.6% (80% of the gain taxed at 27%).
For Trusts:
80% of the capital gain is included in the trust’s taxable income at taxed a a flat rate of 45% which is the highest rate for CGT in South Africa.
However, there’s an important benefit for trusts that is often overlooked - the capital gain can be distributed to beneficiaries.
If distributed, the beneficiaries will pay tax on the capital gain at personal capital gains tax rates (40% of the gain at your marginal tax rate), which will be lower than the trust’s rate.
Capital Gains Tax in Practice:
Let’s break this down with an example for each scenario:
Individual Example:You sell a property for R500,000. You originally purchased it for R350,000, so your capital gain is R150,000. If your marginal tax rate is 30%, 40% of the R150,000 will be taxed as 30%, resulting in a tax bill of R18 000.
Company Example:A company sells an asset for R1,000,000, which it bought for R850,000, resulting in a gain of R150,000. 80% of the R150,000 is included in the company’s taxable income (R120,000) and taxed at 27% resulting in a tax of R32,400.
Trust Example:A trust sells an asset for R500,000, having bought it for R350,000, resulting in a capital gain of R150,000. The trust will be taxed on 80% of the gain (R120,000) at the 45% tax rate resulting in a tax bill of R54 000. However, if the trust distributes the gain to beneficiaries, they will pay tax at their individual rates (the R18 000).
Conclusion:
Capital Gains Tax in South Africa can get a little complicated, but understanding how it works based on your status (individual, company, or trust) can help you better plan your finances and minimize your tax burden. Click here to watch our video to learn more!
If you're unsure about how CGT applies to your situation, or if you need assistance in optimizing your tax strategy, My Finance Partner is here to help. Reach out to us for expert guidance on all your tax matters.
Contact My Finance Partner for assistance: info@mfpartner.co.za
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