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!

BUYERS OF LAND BEWARE - TAX TRAP AHEAD!

THE TAX COP IS WATCHING YOU!!!!!

From 1 October 2007, buyers of immovable property are required to withhold "advance taxes" (for CGT - Capital Gains Tax) where the seller is a non-resident.

ALL buyers where the purchase price is R2m or more should now establish whether the seller is a resident or non-resident - not doing so could land you with a hefty liability to SARS.

If you fail to withhold the tax, you become personally liable for it.

Having to double pay between 5% and 10% of the purchase price will be extremely painful.

The scale varies according to whether the seller is a natural person, company or trust.

The percentages are as follows:
- 5% for a party who is a natural person;
- 7.5% for a party which is a company; and
- 10% for a party which is a trust.

It can also be hard to determine whether or not a seller is a "resident" for tax purposes, so you would be well advised to have the sale agreement professionally checked to ensure that it contains clauses to safeguard your position, including-

The seller's written warranty as to his/her/its residence status, and Authority for your attorneys to withhold the applicable percentage if the seller is a non resident or if there is doubt as to what that residence status is, etc.

Estate Agents must also be alert to this danger - they are at risk, not only of losing their commission, but also possibly of incurring liability to the parties.

Primarily the obligation is that of the purchaser however the agent is the agent for the seller and if the agent fails to ascertain the status of his client and the purchaser is assessed by SARS the act places a liability on the agent.

Courtesy: Routledge Modise Attorneys