Wondering whether or not capital gains tax (CGT) applies to you?
Are your assets subject to this tax?
Firstly, let’s define what CGT is. Capital gains tax is not a separate tax, it forms part of income tax. Essentially, a capital gain is when you sell an asset for more than what you purchased it for. The ‘gain’ or additional amount earned on the asset needs to be reported to SARS as a capital gains tax may apply to it.
Says chartered accounting and tax advisory firm Octagon Chartered Accountants: “Before you dispose of your assets you need to know which ones are subject to capital gains tax. It’s imperative that you are aware of this, as if you miss one of these you could be penalised by SARS.”
But which assets exactly are subject to capital gains tax?
The most important assets include:
- A holiday home, second home or any properties that you rent to tenants;
- Shares, unit trusts, private investments, and second-hand policies;
- A boat exceeding 10 metres;
- Krugerrands, or other silver, platinum or gold-minted coins – or any other coin which market value is mainly in the metal it is made of; and
- The sale of your business that takes place other than when you retire
Avoid capital gains tax errors and a 200% penalty from SARS
Says Octagon: “Now that you know which assets are subject to capital gains tax let’s share some of the disposal timing secrets.
“Remember, the date of the disposal can’t be pre-determined or manipulated.
“The timing rules simply help you to identify the time, in respect of the various forms of disposal, that the disposal will take place for capital gains tax purposes.”
Here are the four most important disposal timing secrets:
1. General timing rule
When you sell an asset, the time of disposal will be the date your asset actually changes ownership. This is generally when you deliver the asset to the new owner and they take on the risk.
2. Special timing rules apply in special circumstances
Certain timing rules apply to special circumstances. For example, in the case of a donation of an asset, the date of compliance with all legal requirements for a valid donation will be the date of disposal.
3. If you scrap or lose an asset
The date of disposal for a lost or scrapped asset will be when you receive full payment for your asset or if there is no compensation the date will be when you establish that no compensation will be payable.
4. Deemed disposals
If your disposal is seen as a capital gain it is known as an ‘event’. The disposal date is the day immediately before the day that the event occurs.
In the event that you fail to include the taxable capital gain, in the appropriate tax return, this error could result in a penalty.
The capital gain constitutes taxable income in terms of Section 26 A of the Income Tax Act, so failing to include it in your return would be a serious error.
But, do I need to pay capital gains tax on the list of assets mentioned above every time?
Well, that all depends on the length of ownership of the particular asset: If you sell an asset that you’ve owned for less than a year (also known as a short-term capital gain), the tax your asset is subject too will be significantly larger than if you disposed of a long-term gain.
“Sometimes, you’ll end up paying around 20% or even higher on capital gains tax for an investment which you’ve held for a year or less,” explains Octagon.
“This is why having a professional tax and advisory firm to guide you is so pivotal. Even if only to avoid being penalised by SARS.”