Capital gains tax for individuals
This is a popular article written for a popular audience. The article only provides a simple introduction to capital gains tax (CGT) to give readers a basic understanding of their liability for CGT. The notes further only explores CGT as it applies to share investments of individuals. Persons must please contact SARS or their own tax advisor or tax practitioner for more information.
Capital gains tax (CGT) is the portion of normal tax which results from the inclusion of a taxable capital gain in your taxable income i.e. the additional amount of tax you have to pay as a result of the inclusion of the taxable capital gain.
CGT forms part of the income tax system and persons do not have to register separately for CGT. You simply have to declare your capital gains and capital losses in your annual income tax return.
Income tax or CGT?
Shares held as trading sock are ones that you bought for the main purpose of reselling at a profit. Any gain or loss you make on a disposal of a share you held as trading stock will be of a revenue nature. Revenue gains are subject to income tax at your marginal tax rate, which may vary between 18% (but effectively 0% if your tax rebates are taken into account) and 40%, depending on the level of your taxable income.
The financial gains made upon the disposal of shares that are held as capital assets (as a long-term dividend-producing investment) will be of a capital nature i.e. will be a capital gain. When you hold shares as capital assets, then any gains arising from the disposal of the shares will be of a capital nature and is subject to CGT. Capital losses may only be set off against other capital gains and not against your ordinary income. (When the sum of your capital gains and losses in a year of assessment is a loss, then the portion of that loss which exceeds the annual exclusion, is carried forward to the following year of assessment as an assessed capital loss that may be used against future capital gains)
A certain amount of your CGT is annually excluded for CGT purposes. This amount is called the annual exclusion and is yearly reviewed by SARS. The annual exclusion increases in the year in which a person dies. A net loss that results after adding together the capital gains and losses for the year of assessment must also be reduced by the annual exclusion.
Year of assessment Exclusion Exclusion in year of death
2014 R30 000 R300 000
What is the rate at which capital gains are taxed?
Capital gains are subject to tax at a lower effective tax rate than income gains. An individual must disregard the first R30 000 (2014 year of assessment) of the sum of capital gains and losses in the year of assessment for CGT purposes. This exclusion is known as the “annual exclusion”. One third (33,3%) of the balance of capital gains remaining after applying the annual exclusion is included in your taxable income and taxed at your marginal tax rate in the same way as for example our salary (revenue). The effective rate of tax on an individual’s capital gain in a year of assessment can thus vary between 0% and 13,32%.
The 0% rate would apply when –
- The sum of capital gains and losses does not exceed the annual exclusion
- The sum of capital gains is less than or equal to the sum of capital losses or
- Taxable income falls below the level at which tax becomes payable
The 13.32% rate would apply when your marginal tax rate is 40% (that is, 40% (marginal rate) x 33,3% (inclusion rate) = 13,32%)
If your marginal tax rate is say 20%, then the taxable part of your capital gain (balance of capital gains after deduction of the annual exclusion) will be taxed at a rate of 6,66% (20% x 33,3% = 6,66%)
A capital gain or loss will arise when you “dispose” of your shares. A disposal will normally occur when you sell your shares. (There are also other conditions under which you will be treated as having “disposed” of your shares, but these are beyond the scope of this article)
Capital or revenue
The first step in calculating your tax liability on a disposal of a share is to determine whether the gain or loss is of a capital or revenue nature. The intention of the taxpayer is the most important factor in determining the capital or revenue nature of a particular profit or loss.
The three year rule
As a general rule, the profits from the disposal of a share will be classified as a capital gain if the share was owned by you for a continuous period of three years before you disposed of it. (Please note that this is only a general rule and that there are many other considerations)
All capital gains or capital losses made on the disposal of shares are subject to CGT unless excluded by specific provisions.
A person’s capital gain on an asset disposed of is the amount by which the proceeds exceeds the base cost of the asset.
A capital loss is equal to the amount by which the base cost of the asset exceeds the proceeds of the disposal.
Example of a capital gain
Proceeds R20 000
Base cost -R5 000
Capital gain R15 000
A capital loss is calculated in the same way
The base cost of an asset is generally the expenditure actually incurred in acquiring the asset (what you have paid for it) together with expenditure directly related to the acquisition or disposal of that asset.
Before you can determine the base cost of your shares you need to adopt a method to identify the shares that you have disposed of. This requirement applies when you dispose of some of, but not all, the shares you hold in a particular company. The three permissible identification methods are –
- Specific identification
- First in first out
- Weighted average
Once you have adopted an identification method for the first listed share disposed of you must continue to use that method for your entire portfolio of listed shares. You will only be able to switch to a different method only once all the shares in your portfolio have been disposed of.
Amounts included in the base cost
The base cost of shares includes –
- The cost of acquisition
- Securities transfer tax or similar tax or duty paid on acquisition of a share.
- The cost of any option exercised in acquiring or selling the shares
- Broker’s fees