Capital gains tax - how to calculate when I sell my property.

Let’s face it…government is now targeting the so-called “wealthy” amongst us! A major focus in the 2012 budget speech was the switch from taxing companies who declare dividends (thereby encouraging companies not to declare dividends), to the shareholders who will now get taxed on the receipt of dividends. Another almost “under the radar” focus was the increase in capital gains tax! or CGT as we know it.

From a financial planning perspective, now is a good time to look into the way in which capital gains tax was calculated in 2011 and compare that to how it will be calculated from March 2012 onwards.

But let’s quickly summarise how capital gains tax is calculated. In next week’s article we can discuss how it was calculated in 2011, and the week thereafter, how it’s going to be calculated from March 2012.

So here’s how capital gains tax works…

• At the end of each tax year (February) we all have to submit an income tax return (If we work that is!).
• At the same time we need to include any taxable capital gain as income on that income tax return.
• Your total capital gain for the year is off set against any capital losses in that year.
• The net gain – or taxable capital gain – is included as income in that year.
• Unfortunately net losses cannot be deducted from income. Losses get carried over from one year to the next and are used to offset any future capital gains

And here’s how capital gains tax is calculated…

• CGT is triggered when you dispose of a capital asset. ‘Disposal’ generally means the sale of an asset, but it also includes things like death.
• When you dispose of asset, you need to determine the proceeds. The proceeds would normally be the selling price.
• Now you would need to determine the base cost of the asset. Without getting too technical, this would usually be the price you paid for the asset.
• Deduct the base cost from the selling price, and it would give you either a gain or loss.
• From this gain or loss you would need to deduct all exclusions and rollovers. If a gain is ‘excluded’ then there is no CGT payable. A ‘rollover’ means that the gain will only be taxed in the future.
• Add up all your various gains for the year which aren’t excluded or rolled over.
• Add up all your various losses for the year which aren’t excluded.
• Now deduct all your losses for the year from all your gains for the year. If you have a net gain, subtract the annual CGT exclusion from it (R30, 000 in 2012).
• Apply the relevant inclusion rate percentage to what remains after the annual CGT exclusion has been deducted, and voilà, this amount is included in your taxable income!