Is SARS’ grubby paw out every time you sell something? The answer is no … not always
A FRIEND of mine is thinking about selling their car, and has expressed concern about the potential Capital Gains Tax (CGT) implications.
Now we’re not talking about a Ferrari Daytona, here—this was some grotty little Toyota Tazz that had barely survived the past ten years ferrying around three small kids and two large dogs, for which said friend was only too glad to hand the keys over to someone else so that they can drive it off to wherever old cars go to die.
My somewhat incredulous initial thought was that I would like to know how it is possible, with most new vehicles sustaining depreciation of around 20% the moment they are driven off the showroom floor, that this friend expected to make any sort of capital gain from their old banger, never mind one that would raise SARS’ eyebrows!
However, the question reflects a misconception that many taxpayers have as to what constitutes a capital gain. Certainly, in my own experience, most people who have entered into nervous conversations with me about CGT are under the impression that the moment they sell something, SARS will be after its share, in the form of CGT, on the full sale proceeds.
This is not true, unless the asset was obtained for nothing. As the name of this particular tax indicates, Capital Gains Tax is the tax payable on a gain in value of an asset. Using a simple example, if you invested in shares with an initial investment of (say) R10 000, held them for longer than three years, and then sold them for R15 000, you would pay CGT on the R5 000 profit.
Assuming that your taxable income puts you within the 31% tax band, and ignoring the annual exclusion, your CGT bill would be R5 000 x 31% (your tax rate) x 40% (the ‘inclusion rate’, or percentage of the gain that is taken into account for calculating CGT)—resulting in an amount payable of R620.
Note also that the CGT liability only arises under one of the following three scenarios:
- When you sell or donate the asset (unless the donation is to an approved Public Benefit Organisation);
- When you die (this gives rise to a so-called ‘deemed disposal); or
- When you cease to be a South African resident for tax purposes (this also gives rise to a ‘deemed disposal’)
The other thing to consider is that not all of your assets give rise to a CGT bill. For instance, your ‘primary residence’ (the Eighth Schedule to the Income Tax Act has a long-winded definition, but for most people this is the home you live in) is exempted from CGT completely, provided that the total gain (profit) is less than R2 million.
A number of so-called ‘personal use’ assets are also excluded from the CGT net. A ‘personal use’ asset is broadly defined in Paragraph 53(2) of the Eighth Schedule as “an asset of a natural person or a special trust that is used mainly for purposes other than the carrying on of a trade”. For those of us who don’t speak tax, this means assets that are used for your personal enjoyment and/or maintenance.
Assets regarded as ‘personal use’ assets includes any assets used ‘mainly’ for non-trade purposes. The courts have held that the term ‘mainly’ means ‘in excess of 50% thereof’, but according to the SARS Comprehensive Guide to Capital Gains Tax, a private motor vehicle that is used for business purposes, for which claims are made against a travel allowance, will not fall fowl of this requirement even if more than 50% of the distance travelled is for business purposes.
Examples of ‘personal use’ assets are: artwork, jewellery, household furniture and effects, a microlight aircraft or hang glider with a mass of 450kg or less, a boat that is 10 metres or less in length, veteran cars, private motor vehicles, and stamp or coin collections.
However, you need to note that certain assets are specifically excluded from the definition of ‘personal use’ assets. An obvious category would be those assets that are purchased for the express purpose of resale. Gains on the sale of such assets, being acquired for the purposes of trade, would not in any event be subject to CGT but to normal income tax.
Other specific exclusions from the definition are:
- Coins made mainly from gold or platinum of which the market value is mainly attributable to the material from which it is minted or cast. This means that while collectible coins would be exempt from CGT, Krugerrands and similar coins would not be.
- Immovable property – your ‘primary residence’ has specific exemptions as described above, while other immovable property is not regarded as for ‘personal use’. This means that even holiday homes are not exempt from CGT.
- An aircraft, the empty mass which exceeds 450 kilograms. Your Lear Jet will therefore not be exempted.
- A boat exceeding 10 metres in length. That would be a problem should any South African become a Formula One racing driver. Your rubber duck would however be exempt, unless you have a really big one.
- A financial instrument as defined in Section 1 of the income Tax Act. This includes investments such as shares, bonds, and the like.
- Any fiduciary, usufructuary or other like interest, the value of which decreases over time. This would mean that while a primary residence is exempt from CGT (within certain limits—see above), “life rights” or the right of use of an asset would not be exempt.
- This is something to bear in mind when drafting your will—leaving your home to the kids, subject to your spouse having the right to live there for the rest of their life may be a bad idea, tax-wise—especially if your surviving spouse should wish to move or emigrate.
- Any long-term policy, for example, an endowment policy or a life policy – these are specifically exempted under Paragraph 55.
- Any short-term policy contemplated in the Short-Term Insurance Act 53 of 1998, to the extent that it relates to any asset that is not a personal-use asset. For example, a policy of insurance against fire or theft in respect of commercial property or a 15-metre yacht would not be exempt, but one covering your rubber duck would enjoy exemption.
Steven Jones is a registered SARS tax practitioner, a practicing member of the South African Institute of Professional Accountants, and the editor of Personal Finance and Tax Breaks.
