CAPITAL GAINS TAX AND IMMOVABLE PROPERTY

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1 UPDATE REAL ESTATE CAPITAL GAINS TAX AND IMMOVABLE PROPERTY SPRING 2008 What you need to know On 1 October 2001 (the effective date), 's tax jurisprudence finally joined countries such as Australia, Canada and the United Kingdom with the implementation of a Capital Gains Tax (CGT) regime. Prior to the effective date, no tax whatsoever was levied on the profit realised on the disposal of immovable property unless the taxpayer concerned was engaged in a scheme of profit-making, whose intention it was to acquire and hold such property as trading stock as opposed to a capital investment. Under the CGT regime, all capital gains received on the disposal of capital assets will, unless specifically excluded, be subject to CGT. The calculation of this taxation is effectively restricted to that portion of the taxpayer's capital gain that accrues to him between the effective date and the date of disposal. A CGT liability applies to any natural person, company, close corporation or trust resident in who disposes of immovable property situated both in and outside as well as to non-residents who dispose of immovable property, or a interest in immovable property, situated in. Primary residence exclusion There is an exemption in respect of property registered in the name of a natural person which is used as a primary residence. The first R1.5 million of the gain is excluded from the CGT regime. This exemption only applies to natural persons generating a capital profit upon disposal of their primary residence and to the extent that the property in question does not exceed two hectares. Therefore, in the case of larger properties used as a primary residence, only the building and surrounding ground of up to two hectares is subject to this exemption. Where the extent of the property exceeds two hectares, the proceeds received will have to be apportioned accordingly. It is interesting to note that in some instances, a primary residence retains its definition as such for a period of time despite the fact that an individual who owns or jointly owns property together with their spouse does not reside therein, for example in the case where that individual has to seek employment away from the primary residence. A secondary residence (for example a holiday house) does not qualify for this exemption. The R1.5 million/ two hectares exemption does not apply to companies, close corporations or trusts owning immovable property. How is CGT calculated? Natural persons will be taxed to the extent of 25% of their net capital gain (capital gains less capital losses) after deducting an annual exclusion amount of R from the capital gain. The taxable capital gain is added to the person's taxable income for the year and a natural person will therefore be taxed at their normal marginal tax rate. Thus in effect, a natural person will be taxed at a maximum of 10% of their capital gain. If the taxpayer is a company or close corporation, 50% of the gain will be taxed at the current company rate of 28%, making the maximum percentage paid by a company or close corporation, 14% of the gain. The effective rate of tax to be paid by a trust, which is not a special trust, is 20%. A taxpayer is entitled to offset non personal-use capital losses incurred against capital gains accrued. Thus a capital loss incurred on the sale of a share can be offset against a capital gain realised on the sale of property. If this results in an assessed capital loss, the loss is carried forward to the next tax year. EVERYTHING MATTERS

2 A capital gain is in effect the difference between the base cost of an asset and the proceeds received on disposal thereof. The base cost of immovable property includes inter alia the sum of expenditure actually incurred in respect of improvements (as long as those improvements are still evidenced in the property at the date of disposal) and incidental costs of acquisition (transfer costs, advertising costs, commission and moving costs). These amounts would include VAT not allowed as an input credit for VAT purposes. In respect of assets owned prior to 1 October 2001, the base cost will be calculated using one of the following three methods: 1 The time-based apportionment method, which is a calculation enabling the taxpayer to determine that portion of the gain which is subject to taxation. For example, the taxpayer purchased a secondary residence five years before the effective date at R Ten years after the effective date, the taxpayer disposes of the property for R (without making any improvements to the property) making a profit of R The taxpayer is only taxed on that portion of the gain, which takes place after the effective date. The calculation of the capital gain is determined as follows: 10 Taxable gain = 15 x 300 = 200 A taxpayer was entitled to have conducted a valuation of his/her property and it was not obligatory to have obtained the valuation from a sworn appraiser or estate agent. It was therefore important, if you elected to value your property, to have recorded and retained all documentation and evidence substantiating your valuation. This would have included comparable sales data and visual material indicating the condition of your property as at the effective date. 3 Where proof of the base cost is unavailable, then in respect of properties acquired before the effective date, 20% of the price on disposal will be deemed to be the base cost. Needless to say, this is an undesirable situation, yet still avoidable if the valuation route is opted for. Non-resident persons Non-residents who dispose of immovable property, or an interest in immovable property situated in, will be liable to pay CGT. With effect 1 September 2007, the purchaser of immovable property is required to withhold a portion of the purchase price in respect of the disposal by non-resident sellers of their immovable property. However, the withholding tax requirement only applies if the total consideration payable by the purchaser to the seller (or an agent of the seller) exceeds an amount of R2 million. The rates of tax applicable are 5% of the purchase price if the seller is a natural person, 7.5% if the seller is a company and, 10% if the seller is a trust. 2 Should the taxpayer have elected the market valuation method, such valuation should have been completed by 30 September Only in instances where the value of the asset exceeded R10 million was it necessary to have submitted the valuation to SARS together with the taxpayer's first tax return after 30 September In other cases the valuation must be submitted to the SARS together with the tax return applicable to the year in which the asset was disposed of, reflecting the disposal of such asset. The taxpayer is not bound to use the valuation method should, at the time of disposal, the taxpayer consider it more CGT efficient to use any of the other methods. The amount withheld is an advance payment in respect of the seller's CGT liability and the seller may apply to SARS for a directive to reduce the amount to be withheld. Where the purchaser knows or should reasonably have known that the seller is not a resident, the purchaser will be personally liable for any amount which ought to have been withheld. Where an agent or conveyancer entitled to payment in respect of services rendered knows, or should reasonably have known that the seller is not a resident and failed to notify the purchaser in writing of such fact, such agent or conveyancer may be held jointly and severally liable for an amount equal to their commission or professional fee, as the case may be. 2 l Real Estate Newsletter Spring 2008

3 Deceased persons A deceased person is treated as having disposed of his/her immovable property other than assets transferred to the surviving spouse of that person at the valuation thereof at the date of death. Thus, where a deceased bequeaths property to an heir other than his/her surviving spouse, the capital gain on the immovable property will be taxed as part of the deceased's estate as if it had been sold to the heir. An exclusion of R is available on death. Where property is transferred to a spouse as a result of death, sale, donation or in consequence of a divorce order, then that spouse will receive a CGT roll-over relief as the spouse is considered to have acquired the property at the original base cost i.e. the value at which his/her spouse acquired the property initially. Sellers or estates of sellers transferring property to their spouses would not be liable to pay CGT. The transferee spouse would however be liable to pay CGT on the disposal of the property subsequent thereto. Record keeping It is evident that CGT calls upon owners of immovable property to keep a diligent record of all documentation motivating their valuation and/ or costs which may be included in the calculation of their base costs. It is therefore important to retain deeds of sale, invoices and receipts associated with expenses incurred in improving the property or legal costs paid to acquire the asset. Furthermore, once you have disposed of your immovable property, the taxpayer is legally required to retain all documentation relating to the asset for four years after the SARS acknowledges receipt of the taxpayer's tax return reflecting the disposal of the asset, or for five years after the date of disposal if no tax return has been submitted to SARS. CONTACT US For further information please contact a member of our Real Estate or Tax practice: REAL ESTATE PRACTICE Hugh Jackson National Practice Head; T +27 (0) E hugh.jackson@dlacdh.com Attie Pretorius National Practice Head; T +27 (0) E attie.pretorius@dlacdh.com Alex Abercrombie Regional Practice Head; T +27 (0) E alex.abercrombie@dlacdh.com Andrew Heiberg Regional Practice Head; T +27 (0) E andrew.heiberg@dlacdh.com Dennis Cavernelis T +27 (0) E dennis.cavernelis@dlacdh.com Michael Collins T +27 (0) E mike.collins@dlacdh.com Lucia Erasmus T +27 (0) E lucia.erasmus@dlacdh.com Simóne Franks T +27 (0) E simone.franks@dlacdh.com 3 l Real Estate Newsletter Spring 2008

4 CONTACT US Daniël Fÿfer T +27 (0) E daniel.fyfer@dlacdh.com John Gomes T +27 (0) E john.gomes@dlacdh.com Rekha Jaga T +27 (0) E rekha.jaga@dlacdh.com Rob Jarvis T +27 (0) E rob.jarvis@dlacdh.com Fred Kolbe T +27 (0) E fred.kolbe@dlacdh.com Len Kruger T +27 (0) E len.kruger@dlacdh.com Fiona McKend T +27 (0) E fiona.mckend@dlacdh.com Raymond Scott T +27 (0) E raymond.scott@dlacdh.com John Webber T +27 (0) E john.webber@dlacdh.com Carla Batt T +27 (0) E carla.batt@dlacdh.com Quintin du Plessis T +27 (0) E quintin.duplessis@dlacdh.com Muhammad Ziyaad Gattoo T +27 (0) E muhammad.gattoo@dlacdh.com Simone Immelman T +27 (0) E simone.immelman@dlacdh.com Tina Kalideen T +27 (0) E tina.kalideen@dlacdh.com Mbongeni Sasekile T +27 (0) E mbongeni.sasekile@dlacdh.com Muriel Serfontein T +27 (0) E muriel.serfontein@dlacdh.com Colleen Smith-Bekwa T +27 (0) E colleen.bekwa@dlacdh.com Matthys Seyffert T +27 (0) E thys.seyffert@dlacdh.com Anthonie Troskie T +27 (0) E tonie.troskie@dlacdh.com Carol Wiggett T +27 (0) E carol.wiggett@dlacdh.com CLIFFE DEKKER HOFMEYR TAX (PTY) LTD Patrick McGurk National Practice Head; T +27 (0) E patrick.mcgurk@dlacdh.com Justin Liebenberg Regional Practice Head; T +27 (0) E justin.liebenberg@dlacdh.com Johan Kotze T +27 (0) E johan.kotze@dlacdh.com Freek van Rooyen T +27 (0) E freek.vanrooyen@dlacdh.com Ide Louw Senior Tax Manager T +27 (0) E ide.louw@dlacdh.com Leon Rood Senior Tax Manager T +27 (0) E leon.rood@dlacdh.com Mariëtte Cruywagen Tax Manager T +27 (0) E mariette.cruywagen@dlacdh.com Ruaan van Eeden Tax Manager T +27 (0) E ruaan.vaneeden@dlacdh.com 4 l Real Estate Newsletter Spring 2008

5 CONTACT US JOHANNESBURG (Sandton) CAPE TOWN CLAREMONT (Cape Town) This newsletter is published for general information and is not intended as legal advice. As every situation depends on its own facts and circumstances, professional advice should be sought For permission to reproduce a publication, please contact our marketing team on marketing@dlacdh.com 6 Sandown Valley Crescent Sandown Sandton 2196 Private Bag X40 Benmore 2010 Dx 154 Randburg T +27 (0) F +27 (0) E jhb@dlacdh.com 1 Protea Place Sandown Sandton 2196 Private Bag X7 Benmore 2010 Dx 42 Johannesburg T +27 (0) F +27 (0) E jhb@dlacdh.com 11 Buitengracht Street Cape Town 8001 PO Box 695 Cape Town 8000 Dx 5 Cape Town T +27 (0) F +27 (0) st floor 2 Long Street Cape Town 8001 PO Box 1221 Cape Town 8000 Dx 39 Cape Town T +27 (0) F +27 (0) th Floor Protea Place Protea Road PO Box Dx 5 Cape Town T +27 (0) F +27 (0) EVERYTHING MATTERS Cliffe Dekker Hofmeyr is a member of DLA Piper Group, an alliance of legal practices