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Valuations for Capital Gains Tax
This brief guide is intended to outline in very broad and brief terms, the key principles that form part of Capital Gains Tax legislation in South Africa relating to immovable property.
The extended period in which to obtain valuations for the purposes of capital gains tax finally expired on the 30th of September 2004. As a result anybody who is the owner of property which was acquired after the 1st of October 2001 will no longer be entitled to use the valuation method for capital gains tax if the property had not been valued prior to the 30th of September 2004. A person (natural or otherwise) who was in fact the owner of immovable property as at the 1st of October 2001 and who obtained a valuation of such property prior to the 30th of September 2004 may still use the valuation method for capital gains tax purposes. However such party must submit the valuation for the property in the tax return for the year in which the property is sold. Failure to do so could result in the Receiver of Revenue not being prepared to accept the valuation method.
A person who purchased immovable property after the 1st of October 2001 may use the method referred to as the normal method referred to in 1 below for the purposes of calculating capital gains tax. A person who purchased the property prior to the 1st of October 2001 and obtained a valid valuation before the 30th of September 2004 may use any one of the four methods referred to below. A person who purchased a property before the 1st of October 2001 but did not obtain a valid valuation before the 30th of September 2004 can use either method 1, 2 or 3 below.
For properties acquired at any time (i.e. before or after the 1st of October 2001):-
The normal method
The capital gains tax is calculated on the difference between the price for which the property is eventually sold and the purchase price which was initially paid for the property. In addition transfer costs, estate agent's commission (on the sale of the property) and the documented costs of any capital improvements to the property can be deducted from the capital gain. It is important to note that capital improvements refer to items which increase the value of the property and do not constitute maintenance of the property. This would include things such as adding an extra bedroom to the house or installing a swimming pool. It would not include costs of repainting the property, repairing the roof or any other items which are treated as expenditure for income tax purposes. Thus the interest on the bond, rates and taxes, charges for water and electricity and similar charges cannot be deducted for the purposes of calculating the capital gains profit.
Only for properties purchased prior to the 1st of October 2001:-
Time apportionment method
The capital gain is calculated as in (1) above. The net capital gain is then pro rated according to the number of years for which the property was held after the 1st of October 2001 in relation to the number of years in respect of which the property was owned prior to the 1st of October 2001 with a maximum of 20 years prior to the 1st of October 2001 being taking into account. Thus for example if the property was purchased 10 years before the 1st of October 2001 and sold 5 years after the 1st of October 2001 only one third of the resultant capital gain would be added to the tax payers tax i.e. only 5 years of the 15 years will be taken into account as the property was owned for 15 years but only 5 of those years were after the 1st of October 2001.
The 80/20 principal
In terms of the same, 20% of the capital gain is effectively exempted from capital gains tax. Accordingly 20% of the proceeds is considered as the value of the property as at the 1st of October 2001 and the capital gains tax is then calculated on the remaining 80%.
For properties purchased prior to the 1st of October 2001 and a valid valuation was obtained before the 30th of September 2004
The valuation method
Capital gains tax is calculated on the difference between the price for which the property is eventually sold and the valid valuation of the property as at the 1st of October 2001. In addition estate agent's commission (on the sale of the property) and the documented costs of any capital improvements to the property affected after the 1st of October 2001 can be deducted from the capital gain. Capital improvements prior to the 1st of October 2001 cannot be deducted as they have already been taken into account in the valuation of the property as at the 1st of October 2001.
Any tax payer who owned the immovable property before the 1st of October 2001 and sold the property subsequent to the 1st of October 2001 is entitled to elect which of the four methods referred to above such party wishes to utilize (assuming of course that such party obtained a valid valuation prior to the 30th of September 2004). If the party did not obtain such valid valuation prior to the 30th of September 2004, then the party can only use methods 1, 2 and 3 referred to above. It is advisable for a taxpayer to work out the net effect in respect of each of the methods before electing which of the methods to utilize.
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