CAPITAL GAINS TAX

INFLATION & CAPITAL GAINS TAX

Inflation

There were two interesting announcements recently.

1. Moody's expects SA's inflation in 2022 to reach as high as 8% (but then to decrease in 2023/2024 to the SARB's target range of 3-6%.

We are seeing elements of this on the ground, food prices, petrol prices, two retailers this week announced a limit on two bottles of cooking oil to each customer (as a result of supply shortages, mainly because of the Ukraine/Russia conflict.

This higher than anticipated inflation forecast could have an increasing pressure on our own interest rates and there will probably be a 0.5% increase at some point this year.

Interest rates currently are currently low by South African standards.

Prime is 7.75% whereas in January 2020 it was 10%.

2. Another interesting point is that on 4 May 2022, America increased its own interest rates by 0.5%. This is the US's largest single interest rate rise announcement in 22 years! This too will impact SA's interest rate trajectory.

Local interest rates are in an increasing cycle, and we need to budget for more than the 0.75% the Reserve Bank initially forecast in previous announcements.

We believe we will get more than 0.75% increases in the remainder of 2022 as a direct result of global markets (Australia, UK, India, etc.) all increasing interest rates, as well as our own increasing inflation figures. 

This is not a catastrophe. 8.25% is still traditionally low by South African standards. Budget and plan accordingly with the increasing rates in mind.

Capital Gains Tax

The property market has been a hive of activity. Many consumers are asking about Capital Gains Tax and how it affects their sale proceeds.

It always best to speak to your accountant / tax consultant, but here is a synopsis about Capital Gains Tax (CGT).

Capital Gains Tax was introduced on 1 October 2001.

It comes about most often for taxpayers when their home or investment property is sold for a profit (gain) i.e., the proceeds/selling price is more than the "base cost". The "base cost" is the purchase price plus any amounts spent on renovations or improvements, plus a few other smaller costs. It is a tax on profit made on your home, for example.

There are various formulas/methods to work out the actual capital gain, but simplified it is the proceeds on your sale of the capital asset (like your home) less the cost (or base cost) of that asset (i.e. the profit). 

This profit (or capital gain) is taxed at a lower rate than normal income - because only a portion of the capital gain (currently 40%) is included in taxable income, and not the full profit.

The Tax Act does provide a R2 million "primary residence exclusion" for those taxpayers who sell their primary residence (i.e., the home in which they live). This means that the first R2 million of your capital gain is exempt from tax, meaning that many taxpayers won't actually need to pay Capital Gains Tax on the sale of their home.

If you and your spouse own a primary residence together, the exclusion of R2 million is split between the two of you, so you each qualify for an exclusion of R1 million.

Here is an illustrative example:

Example 1 - Selling your Primary Residence

Consumer buys a home for R 2 500 000. 

He spent R 400 000 renovating it

Sell it for R 4 000 000 a few years later. 

Assuming its their primary Residence (lived in this house for the whole time that he owned it) and therefore it would be regarded as his primary residence for tax purposes.

The capital gain calculation for the tax year of 2022 is:

 Proceeds = R 4 000 000

Base cost = R 2 500 000 + R 400 000 = R 2 900 000

Capital gain = R 4 000 000 - R 2 900 000 = R 1 100 000

Taxable capital gain = R 1 100 000 - R 2 000 000 Primary residence exclusion =  R 0 

Using the same example but now you're selling your investment property

Example 2:

Proceeds = R 4 000 000
Base cost = R 2 500 000 + R 400 000 = R 2 900 000
Capital gain = R 4 000 000 - R 2 900 000 = R 1 100 000

Primary residence exclusion is not applicable.
Net capital gain = R 1 100 000 - R 40 000 (annual exclusion) = R 1 060 000
Taxable capital gain at an inclusion rate of 40% = R 1 060 000 x 40% = R 424 000
 
Add this R424 000 to your other taxable income, see your relevant tax bracket and that's the marginal tax rate applied to the gain. 

If your salary is R 1 million, you would be in the 41% tax bracket. 

Then this capital gain of R424 000 is taxed at your marginal rate of tax is 41% 

You will pay approximately R 171 000 capital gains tax. (You can work this out by taking R424 000 x 41%.)

Tax is a consequence of a good investment!

Other notes to take into consideration

There are instances when CGT does not apply.

There is no CGT on personal use assets (washing machines, furniture, car) etc.

Also, if you sell your home to your spouse - this is a simple and good news tax story, as transfers between spouses are tax free so you don't need to pay any tax at all on this sale. Just remember to include it in your tax return though, as the proceeds will be equal to the base cost.

There is also a R40 000 annual exclusion per year per individual.

This is a brief discussion around of CGT, and there are many nuances to CGT. It is strongly recommended that you discuss CGT with your accountant or tax consultant.