CGT and property

Posted On Monday, 20 May 2002 02:00 Published by
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The previous 2000/2001 National Budget introduced significant tax reforms, including Capital Gains Tax (CGT), designed to tax capital accruals that presently escape income tax, and thereby closing perceived ‘tax loopholes’.

Capital Gains Tax.

 

The previous 2000/2001 National Budget introduced significant tax reforms, including Capital Gains Tax (CGT), designed to tax capital accruals that presently escape income tax, and thereby closing perceived ‘tax loopholes’.

 

There are two methods for calculating CGT; market valuation basis and time-based apportionment basis. Purchase price, time frames, sector performance and locality are all key issues having an influence on property performance, and in determining therefore what method to employ. In general terms, the shorter one’s property holding time-frame horizon and/or the longer the historic holding period, the more important it is to have a thorough valuation conducted. The valuation method has been extended to two years (30 September 2003) from effective date of CGT implementation with this period further extendable at the Minister of Finance’s discretion. Failure to comply will automatically bring in the time-based method. Valuations must reflect market value at the 1 October 2001 proposed implementation date.

 

CGT occurs at the point of disposal and is payable on the difference between the disposal proceeds and the base cost which includes:

·        Acquisition costs, incidental acquisition and disposal costs – including legal fees, agent’s commission, stamp duty, transfer duty, conveyancing costs, advertising costs, broker’s fees and valuation costs;

·        Capital maintenance costs (but not operational or current costs such as interest, repairs, insurance, rates and taxes); improvement or enhancement costs; and

·        VAT not claimed for income tax or refunded or credited for VAT.

·        Wear and tear or capital allowances permitted for income tax purposes

 

Some Property-related Implications:

 

·        Since CGT losses may not be offset against anything other than CGT gains, property holders with assets located in various companies or entities are probably well advised to consolidate the properties into a single company.

·        Property developers and traders will continue to be taxed on the proceeds of disposal under the normal tax regime whereby revenue is recognised and profit is taxed.

·        Under the current tax regime, the interest on purchase price and rates payable by manufacturers purchasing land in order to erect a new factory, is not deductible as the property is not yet in use. Under CGT, these costs will now be allowed to form part of the base costs noted above.

·        Property yields could come down further as higher-end valuations are adopted.

·        If valuations either under or overstate the capital gain or loss when compared to the time-based apportionment, penalties may be imposed.  In disposing of assets, including fixed property where market value exceeds R10 million, copies of valuations must be submitted.

.


 

CGT Effective Rates. Source: SARS Guide to Capital Gains Tax and amendments to Inclusion Rate (Memorandum)

Taxpayer

Inclusion rate %

Statutory tax rate %

Effective tax rate %

Individuals

25

0-42

0-10,5

Retirement Funds

N/A

-

-

Unit Trusts (Resident Funds)

·         Unit

·         Special

·         Other

 

N/A (payable by unitholder)

25

50

 

-

30

30

 

-

7.5

15

Life Assurers

·         Individual policyholder fund

·         Company policyholder fund

·         Corporate policyholder fund

·         Untaxed policyholder fund

·                           Retirement fund business

·                           Other exempt business

 

25

50

50

 

N/A at this stage

N/A

 

30

30

30

 

-

-

 

7,5

15,0

15,0

 

-

-

Companies (standard)

Small business corporations

50

50

30

15-30

15,0

7.5-15

 

Marc Schneider

Eprop Research

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