Tax Planning – Disposal of Your Primary Residence
Tax Planning Around the Disposal of your Primary Residence in South Africa – 2014
In South Africa, while Capital Gains Tax (CGT) won’t relate to every single property transaction, it is very important that those looking to sell their property understand the implications that it may have on the sale of their properties. One needs to look closely at the provisions of the income tax act in order to plan appropriately.
To determine the capital gain made in a property transaction you will need to deduct the amount that property sold for (Proceeds) from the base cost of the property. Essentially CGT it is the tax that is payable by a seller on any capital profit made from the sale of a fixed property or any capital sale of assets globally. This is becuase South Africa uses the residence basis of taxation. (Refer to residency test for further information in this respect).
While CGT applies to all individual South Africa resident taxpayers as well as companies, close corporations and trusts, foreign investors are not exempt. Any non-South African resident taxpayer who sells an immovable property in South Africa will be liable to pay the applicable CGT on that transaction. Although many capital gains or losses on the disposal of an asset are subject to CGT, there are some cases where transactions are excluded due to specific provisions. It is important for investors and property owners to be familiar with these in order to extract the maximum possible tax benefits allowable.
These provisions can be found in the Eighth Schedule to the Income Tax Act, 1962 (the Act), which determines a taxable capital gain or assessed capital loss. With regards to the sale of a primary residence, the large majority of property sales transactions will not be subject to CGT because the first R2 million of any capital gain or loss on the sale is disregarded for CGT purposes.
In terms of the income tax act, a primary residence is defined as a property which is owned by a natural person. The owner or their spouse must ordinarily reside in the property as their main residence and it must predominantly be used for domestic purposes. In cases where the property has been used for business purposes, the exemption will be apportioned for those periods where the property is not used as a primary residence.
There are some cases where the owner of the property will be treated as having been ordinarily resident for a continuous period of up to two years even if they have not been living in the primary residence during that two-year period, provided the following circumstances apply:
• The primary residence has been accidentally rendered uninhabitable.
• The primary residence was in the process of being sold while a new primary residence was acquired or was in the process of being acquired.
• The property was being built on land acquired for the purpose of erecting your primary residence.
Before 1 March 2012, the primary residence exclusion was R1.5 million, however the exemption on a primary residence has been changed to R2 million.
He says it is important to remember that this is based on the capital gain made on the sale and not the purchase price of the property, so there are a number of expenses that will need to be deducted to determine whether CGT is applicable.
For a seller to determine the capital gain made in a transaction they will need to deduct the amount that property sold for from the base cost of the property. The base cost is determined by combining the original price the seller paid for the home along with all costs incurred during the buying and selling of the property. These costs would include expenditure to acquire the property, transfer costs and duties, attorney fees, agent’s commission and other services rendered. While these costs can also include any renovations which qualify as improvements to the property, routine maintenance costs may not be included.
Once this base cost of the property has been determined, it is then possible for the South African Revenue Services to calculate the CGT to be paid based on the net profit realised. According to Section 26A of the Act provides that a taxable capital gain must be included in the seller’s taxable income and will be taxed according to their tax bracket. The CGT is payable when the individual’s income tax return is submitted at the end of the financial year during which the property was sold.
In the instance where a primary residence is registered jointly in the names of the owner and their spouse, each would benefit from the residential exclusion according to the interest they hold in that residence. So if each spouse holds an equal share in the property, each would qualify for a primary residence exclusion of R1 million. Although this is provided that both parties reside in the property together and do not own separate primary residences. No exemption will apply on capital gain realised from the sale of an individual’s second home or holiday home.
It is always advisable to seek the advice of a professional tax consultant if there are any areas regarding CGT that sellers are unsure of. An expert tax consultant or conveyancing attorney can offer invaluable guidance through the submission process. Please contact us on 011 447 8823 to speak to an expert CGT consultant today.
Download a FREE Quick Guide to Capital Gains Tax in South Africa Provided by the South African Revenue Services.