Audio Version

Capital Gains Tax for Individuals

An important part of your tax planning is how you manage capital gains tax.

Capital gains tax (CGT) is a tax on the profit made from the sale of assets such as investments, property, shares, or businesses. For individuals, 40% of the profit is included as part of your income and taxed at your marginal tax rate. There is an annual R40 000 exclusion, which is deducted from your capital gain.

As an example, if you buy an investment for R2mil and you sell it for R3m, you have made a capital gain of R1 million. Of this R1million gain, R40,000 is excluded, and the remaining 40% is subject to tax, i.e., R384 000 will be included in your income that is taxed at your marginal tax rate.

Therefore, the tax on a capital gain of R1mil will be R69 120 to R172 800, depending on your personal income tax rate.

Capital gains tax is also triggered when you pass away, when you donate capital, or when you emigrate.

Trusts and companies have an inclusion rate of 80%, while individuals have a lower inclusion rate of 40%

Don’t let CGT delay your asset disposal decisions.

• Capital gains tax rates may increase in the future.

The individual capital gains tax inclusion rate has increased from 25% to 40%. We believe that there is a high probability that this inclusion rate will increase further, as this is an area of wealth that SARS can easily exploit.

	Before 1 Mar 2012	From 1 Mar 2012 to 1 Mar 2016	After 1 Mar 2016	Next inclusion?
CGT Inclusion rate	25%	33.3%	40%	?

 

• Buy low & sell high.

Don’t postpone realising your gains or making an important strategic change to your investments to avoid CGT. The risk is that your potential gain is lost, which is likely to be far more than the potential CGT avoided.

• A higher base cost will be established.

When selling assets and paying capital gains tax, the disposal value of your investment will become the new base cost, and your future capital gains will be calculated from this higher base, resulting in your next trade or sale triggering significantly lower capital gains.

• You will eventually need to pay capital gains tax.

Whether you decide to sell your assets later or be forced to do so on your death, or the death of your spouse or partner; your assets will eventually trigger capital gains tax, and someone will need to foot the bill one day.

Consider that if you are faced with a capital gains tax liability, you view this rather as good news, as it’s likely you have made a positive return, are banking your profits, and zeroing your unpaid tax liability on the profits made.

Comparing capital gains tax vs tax on interest earned.

The chart below compares the impact of tax on interest earned versus capital gains tax on investment returns. We have assumed an individual aged 65, with a 30% marginal tax rate investing R1mil for 1 year.

The dark blue line is your investment return before tax. The light blue line is your return after CGT and the grey line is your return after interest earned is taxed. A better after-tax return is achieved from an investment with capital growth versus an interest-bearing investment.

Compared with tax on interest, only a portion of a capital gain is subject to tax. It is therefore beneficial to have exposure to capital assets in investment vehicles that are generally subject to tax on growth: e.g., unit trust investments and endowments.

Alternatively, it is less tax-efficient having too much of your savings in interest-bearing assets, like bank products, as nearly all the interest you earn will be taxed. You can rather have more interest-bearing assets in tax-advantaged accounts, like retirement funds or annuities.

Capital gains tax exclusions

Not all your capital gain is subject to tax. You will be afforded some exclusions, i.e., amounts that will decrease your taxable amount:

• Individuals are only subject to capital gains tax on gains made above R40,000 each year.
• On death, this exclusion increases to R300,000.
• Personal use assets are not subject to capital gains tax (cars, boats under 10m in length, and planes exceeding a mass of 450kg).
• The gain you make when selling your primary residence has a R2,000,000 exclusion.
• Business owners are afforded a small business exclusion of R1,800,000.

The small business exclusion will apply when you are 55 or older, that your shareholding exceeds 10%, you had active involvement in the business for at least 5 years and the disposal itself is less than R10m.

Making provision for capital gains tax in your planning

Within your longer-term planning, it is important to make provision for capital gains tax. Although capital gains tax can mean an additional payment to SARS, it often only makes up 1% p.a. or 2% p.a. of your overall long-term returns.

As an example, if we assume you had bought shares for R1 million 10 years ago, and achieved a return of 10% p.a., you may be required to pay tax of R 186k on the sale of these shares. We have assumed you have a marginal tax rate of 30%.

Despite this lump sum tax liability, you would still have achieved an after-tax return of around 9% p.a.

For this reason, our financial planning models and projections will adjust returns for capital gains tax and all forms of tax, depending on the investment vehicle.

Speak to one of our Client Portfolio Managers to help establish if you have the correct balance between interest-bearing investments and capital assets, and whether it would be in your best interest to pay capital gains tax now.