The ramifications and implications of South Africa’s Capital Gains Tax are these days fairly well understood by the business community and those with substantial assets, but the average home owner, says Bill Rawson, Chairman of the Rawson Property Group, quite often has never really investigated or got to grips with the act and has in his mind a number of erroneous conceptions regarding it.
An important initial point to grasp, says Rawson, is that the ‘gain’ only becomes taxable once the asset is disposed of or following the death of the asset owner.
“The Capital Gains Tax is not a tax, as some seem to think, which comes into force every two or three years following a revaluation of the property or asset.”
Then, too, says Rawson, a distinction must be drawn between revenue and capital. Rent from a property or interest on savings are clearly revenue – but the sale of an asset which produces revenue might be regarded as a capital gain transaction.
If the asset was acquired with the intention of making a profit, its proceeds would, obviously, be revenue, but if it was bought to provide accommodation or as a financial investment (e.g. JSE shares) it would count as capital. These distinctions seem fairly clear, says Rawson, but SARS have occasionally taken different stances here, leaving some of their clients confused. In general the onus lies on the tax payer to prove that certain sums are capital not revenue.
Compiling this proof, adds Rawson, is always a worthwhile exercise because capital gains are generally taxed at a lower rate than revenue – and here the tax payer’s declared ‘intention’ in purchasing an asset is important. In those cases where his intentions may be mixed, e.g. to provide accommodation and to rent out a property for part of the year, this is acceptable to SARS, but when property owners regularly buy or sell property, SARS are entitled to and almost certainly will see this as a trading activity on which their profits will be taxed as revenue.
If the owner, however, clearly intends to keep a property for long term capital growth, the eventual ‘profit’ on it will be seen by SARS as a capital gain.
SARS, adds Rawson, will also probably want to know the way in which the asset was bought: if it was acquired by means of a short term loan, SARS will probably take the view that the buyer had no intention of holding onto it for long term capital gain.
Where the asset is for the buyer’s own use, e.g. a ‘primary’ home, furniture, jewelry, etc. the Capital Gains Tax exemptions will apply, within certain limits – for example, the first R3,5 million gain on a primary home is Capital Gains Tax exempt. Home owners who use part of the home for business may be liable for different tax structures.
“In general,” says Rawson, “SARS have proved extremely reasonable and approachable, but it is certainly worth establishing the difference between revenue and capital gain early on so as to keep tax to the minimum possible level.”