Most of us can’t help but smile when we receive our paycheck at the end of the month and see how much money we’ve earned. On the other hand, if you’re still smiling when you realise how much of your money is being taken by the government in taxes, you’re probably suffering from some sort of severe head trauma. You may think that the taxman couldn’t stoop any lower, but you’d be wrong. You see, on top of paying all this money, the task of figuring out how it’s all calculated also falls on your shoulders. One such calculation involves capital gains. But what are they? How are they taxed and how do they compare with standard income tax? What is Capital Gains Tax?
A Capital Gains Tax (CGT) is a tax that applies to the profits made on certain assets and investments when they are sold, these profits are known as your capital gains. Normally, you can work out your capital gains in the following way –
| The original amount that you spent on the asset (a property, for example) -Added to- (+) Any capital expenditures (this includes things like renovations and extensions to the property) -Subtracted from- (-) The amount you sell it for (after deducting your selling expenses) -Equals- (=) Your capital gains Therefore we can give the formula (Original Amount + Capital Expenditures – Selling amount = Capital Gains ) |
Ok, so now you know how to work out your capital gains, but how do you work out the taxes on them?
Is Capital Gains Tax Separate from Income Tax?
CGT is not separated from income tax and should instead be viewed as a part of it. There isn’t a flat tax rate when it comes to CGT, so when submitting your taxes you should first determine the CGT inclusion rate (40% for most individuals) on your capital gains along with any notable exclusions or exemptions and then add the resulting amount to your standard taxable income which will then get taxed normally via income tax.
The amount you end up paying for your capital gains through this process will give you your effective CGT tax rate (usually around 18% for most individuals).
Your CGT is going to be highly personalized, as many factors and exceptions (we’ll go into these later) may influence your final taxable gains. Luckily, there are many CGT calculators which can help streamline the procedure.
For an individual with a marginal tax rate of 39%, a simplified example may look something like this –
| Capital Gains (after deducting any relevant exclusions/exemptions) X 40% (inclusion rate) = Taxable Capital Gains (Taxable Capital Gains + Taxable Income) X 39% (marginal tax rate) = Income tax payable |
When do Capital Gains Taxes Apply?
According to SARS, CGTs are triggered whenever an asset is disposed of after 01 October 2001, with ‘disposal’ being defined as an asset which is –
- Sold
- Given away
- Scrapped
- Exchanged
- Destroyed
- Redeemed
- Cancelled
This definition also applies to intangible assets which mean things like stocks and bonds. That said, there are various expectations to the rule that are not subject to CGT, namely –
- Capital gains or losses of R2 million for primary residences
- Most personal use assets (this includes things like cars, cell phones, etc)
- Retirement Benefits
- Payments in respect of original long-term insurance policies
Additionally, certain individuals and groups may have certain exceptions apply to them, for example –
- An annual R40 000 exclusion for gains or losses for individuals and special trusts
- A small business exclusion of R1, 8 million for individuals (age 55+) when a small business with a market value under R10 million is disposed of
- A R300 000 exclusion for individuals in the year of death takes the place of the annual exclusion for that year
If your asset or investment does not fall under the aforementioned criteria, you may have to pay CGT when disposing of it.
How does a Capital Gains Tax apply to Stocks and Bonds?
As noted, CGT applies to intangible assets such as stocks and bonds. With this in mind, CGT can apply to the sale of stocks and other investments in the same way that it would to the sale of a property if the stocks in question are considered capital assets.
When, for example, the stocks are sold, you would calculate how much you sold the stock for (sales price) and subtract that figure from the amount that you originally paid for it (purchase price), multiple this amount by the number of shares sold and the resulting number would be your capital gains for that asset to which the CGT will apply. After considering any potential exceptions this amount can then be added to your taxable income before your marginal tax rate is applied.
It should be noted, however, that the sale of assets such as stocks can result in different taxes depending on the nature of the asset itself.
Does a Capital Gains Tax apply to Trading?
For the most part, no, shares that are held as trading stock are treated as revenue gains and are taxed differently from capital gains.
These stocks are normally differentiated as ones that are ‘bought for the main purpose of reselling at a profit’. In other words, if you hold a share as a capital asset (a long-term dividend-producing investment) for many years before selling it, you’ll probably only have to pay CGT upon disposal. On the other hand, if you buy and sell shares within a relatively short period (within a few months, for example) any profits you make from the sales will be taxed as revenue gains.
How are Revenue Gains Taxed?
Unlike capital gains, which are usually taxed at a lower rate than your income gains, revenue gains are taxed at your marginal tax rate which may be much higher.
Realised Capital Gains vs Unrealised Capital Gains
When considering the potential profit you may accrue from the sale of certain assets, you may come across the terms ‘realised’ and ‘unrealised’, but what do these mean?
Simply put, when your assets have increased in value since they were purchased, they are considered ‘unrealised gains’. This means that, if you were to sell them, you would make some sort of profit, but that gain is currently on paper only. These unrealised gains usually do not need to factor into your taxes.
Once an asset has been sold and a profit has been made, however, you have ‘realised’ your gains and some tax will usually apply.
When does Capital Gains Tax have to be Paid?
CGT becomes payable when you receive your income tax assessment (IT34).
In Conclusion – What is Capital Gains Tax and when does it Apply?
CGT is a part of income tax that applies to the profits or ‘gains’ made when disposing of certain assets. When dealing with CGT, the first step is to determine what your capital gains are after selling an asset, this is done by adding the original cost of the asset to any capital expenditures or investment costs associated with it before subtracting this number from the amount the asset was sold for, the resulting figure is your capital gain for that sale.
There is no flat Capital Gains Tax rate in South Africa and many potential factors may influence the amount you pay. Notably, you’ll need to consider your CGT inclusion rate. This needs to be applied to your capital gains and the resulting figure then needs to be added to your taxable income which should be taxed at your marginal tax rate.
That said, many exemptions exist which may lower or even nullify your CGT in certain scenarios, as such, an online CGT calculator or trained professional should be consulted to ensure that you are paying the right amount.
Additionally, most personal use assets such as cars and cellphones are normally exempted from capital gains tax.
A differentiation is generally made between capital assets that are held for long periods of time and others that are held in the short term for purposes of a profitable resale, the best example of this can be seen with regard to stocks. Shares that are held for many years before being sold for a profit will usually be subject to CGT which normally has a lower tax rate than income gains. On the other hand, trading stocks that are bought and sold relatively quickly (perhaps over the course of months or even weeks) are viewed as revenue gains and are subject to the standard marginal tax rate.
Disclaimer LAW101: All of our posts are for research purposes only. Law 101 aims to assist its readers with useful information on the laws of our country that can guide you to make decisions in line with the South African Governmental Laws currently in place. Although our posts cite the constitution in many instances, they are intended to assist readers who are looking to expand their knowledge of the law. Should you require specific legal advice we advise you to get in touch with a qualified legal expert.
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