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Capital gains tax on replacement property

Nov 20 2014 13:27

A Fin24 is not sure if capital gains tax applies to her sale and quick purchase of a second property. She writes:

Our primary residence is on our farm. We will retire soon and the residence will then be used by our son, who runs the farm.

Ten years ago We bought a retirement flat in my name for R258 000. We are married out of community of property.

However, due to politics in the complex, the flat was sold last year for R1.8m and immediately replaced by a house for R1.1m.

How will tax or capital gains tax (CGT) be calculated?

I am registered as a sole proprietor, but have not had an income from my business since December 2012. I am also working for a small salary, below the threshold - R4 858 per month.

The reason for my query is mainly because I was told that, if a property gets replaced with another, CGT does not apply. I thought at least the difference between the two properties, would be taxed.

We managed to find the replacement home within ten days of signing the papers for the flat.

Pieter-Jan Bestbier, a director of auditing firm LDP, responds:

Capital gains tax is not a separate tax, but forms part of income tax. A capital gain arises when you dispose of an asset on or after October 1 2001 for proceeds that exceed its base cost.
 
The relevant legislation is contained in the Eighth Schedule to the Income Tax Act.

In terms of paragraph 66 of the Eight Schedule certain transactions qualify for a roll-over of CGT until the disposal of a replacement asset.  

However, the replacement of a property does not qualify in terms of paragraph 66 and as such the disposal of the flat will be subject to CGT.

The tax due as a result of the disposal of the property will be calculated as follows:

Proceeds – base cost = capital gain – annual exclusion = taxable capital gain x inclusion rate = amount to be included in taxable income.

Proceeds can be defined as the amount which is received by or which accrues to the seller of the asset. In this case it will be the R1.8m.

The following are included in the base cost of an asset:

- Acquisition cost: these costs are actually incurred in acquiring or creating an asset. For example, this could include the cost of purchasing an asset or the cost of erecting a building. The expenditure should not have been claimed against income.

- Incidental costs of acquisition and disposal;

- The remuneration of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal advisor, for services rendered in relation to the asset;

- Transfer costs;

- Stamp duty, transfer duty or similar duty (for example, securities transfer tax);

- Advertising costs to find a seller or to find a buyer;

- The cost of moving that asset from one location to another;

- The cost of installing an asset, including the cost of foundations and supporting structures;

- Donations tax paid in certain circumstances;

- If that asset was acquired or disposed of by the exercise of an option (other than the exercise of an option acquired before the valuation date), the expenditure actually incurred on the acquisition of the option;

- Value-added tax not allowed as an input deduction (section 23C);

- Capital costs of establishing, maintaining or defending title or right to an asset.

In this case the base cost will be R258 000 plus any other expenses directly related to the acquisition or disposal of the property.

The annual exclusion for the 2014 financial year is R30 000 and the inclusion rate is 33.3%.

If we assume there are no other expenses to add to the base cost, the amount to be included in the taxable income will thus be calculated as follows:

R1 800 000 (proceeds) – R258 000 (base cost) = R1 542 000 – R30 000 (annual exclusion) = R1 512 000 x 33.3% (inclusion rate) = R503 496

If the salary of R4 858 per month is the only other income, the taxable income for the 2014 tax year will be the annual salary of R58 296 plus the capital gain of R503 496, which will then mean that the total taxable income will be R561 792.

Tax on this amount, without taking any deductions into calculations and assuming the taxpayer is not older than 65, will be R143 937.76.

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