Capital Gains Tax 101: What It Is and How Does It Work?
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When you sell something valuable and make a profit, the taxman wants a cut. That cut is called Capital Gains Tax (CGT), and if you're an accountant in practice or commerce, understanding how it works can help you save your clients money or keep your company out of SARS's spotlight.
What is Capital Gains Tax?
CGT is a tax on the profit you make when you sell an asset for more than you paid for it. It’s not a separate tax but part of your income tax. Only the gain (not the total sale price) is taxed, and it kicks in when you sell, donate, exchange, or otherwise dispose of an asset.
What Assets Are Subject to CGT?
Not everything you sell is taxed, but plenty of valuable things are, including:
Property (excluding your primary residence, up to a point)
Investments like stocks and shares
Business assets (think equipment, trademarks, etc.)
Valuable personal items (art, antiques, collectibles)
Certain intangible assets (like goodwill in a business sale)
How Do You Calculate the Gain?
The basic formula is:
➡️ Selling Price – Purchase Price – Allowable Costs = Capital Gain.
Allowable costs can include improvements, legal fees, and commission costs involved in buying or selling the asset. SARS allows you to deduct these to reduce the tax bill.
Are There Any Exemptions or Reliefs?
Yes! The tax system isn’t entirely heartless. Some common reliefs include:
Primary Residence Exemption: The first R2 million of the gain on your main home is usually exempt.
Annual Exclusion (Individuals): Every individual is entitled to an annual CGT exclusion of R40,000. So if your total gains are under that, you owe nothing (SARS CGT Guide, para 5.3).
Small Business Relief: Business owners over 55 selling small business assets may qualify for relief up to R1.8 million (SARS CGT Guide, para 12.6).
Rollover Relief: Some asset disposals qualify for deferral, such as involuntary disposals where a replacement asset is acquired (SARS CGT Guide, Chapter 13).
Tax Rates and Inclusion Percentages
Individuals: 40% of the capital gain is included in taxable income. With a max marginal tax rate of 45%, the effective CGT rate can be up to 18%.
Companies: 80% inclusion rate, taxed at the corporate rate of 27% resulting in an effective CGT rate of 21.6%.
Trusts (excluding special trusts): 80% inclusion, taxed at 45% leading to an effective CGT rate = 36%.
When and How Do You Report CGT?
Gains must be reported in your annual tax return. SARS expects you to disclose all disposals, calculate the gain or loss, and pay any CGT due by the normal tax deadlines. Miss it, and penalties or interest may apply.
Two Real-World Examples
📊Example 1. Individual Selling Shares
Janine bought 1,000 shares on the JSE at R10 each (total R10,000), paid R200 in acquisition costs, and sold them five years later for R20,000, paying R300 to sell.
Base cost = R10,000 + R200 = R10,200
Proceeds = R20,000 – R300 = R19,700
Capital gain = R19,700 – R10,200 = R9,500
Annual exclusion R40,000 exceeds the capital gain → No CGT payable.
Note: Five years is generally considered a sufficient holding period for CGT treatment, provided the shares were acquired with the intention of investment (SARS CGT Guide, para 2.4.3.1).
📊Example 2. Company Selling Property
ABC Pty Ltd bought commercial property for R2 million, spent R100,000 on acquisition costs and R400,000 on renovations. They sold it for R4 million, incurring R200,000 in selling costs.
Base cost = R2,000,000 + R100,000 + R400,000 = R2,500,000
Proceeds = R4,000,000 – R200,000 = R3,800,000
Capital gain = R3,800,000 – R2,500,000 = R1,300,000
CGT inclusion (80%) = R1,040,000
Tax at 27% = R280,800 CGT payable
📊Example 3. Property Sold by an Individual:
Lerato sells a second property she owns (not her primary residence) for R1.5 million. She originally bought it for R800,000 and spent R50,000 on legal and transfer fees, plus R150,000 on improvements. Selling costs were R70,000.
Base cost = R800,000 + R50,000 + R150,000 = R1,000,000
Proceeds = R1,500,000 – R70,000 = R1.430,000
Capital gain = R1.430,000 – R1,000,000 = R430,000
Annual exclusion = R40,000
Taxable capital gain = R430,000 – R40,000 = R390,000
CGT inclusion (40%) = R390,000 × 40% = R156,000
If Lerato is at the top marginal rate (45%), CGT = R70,200
Bottom Line?
Capital Gains Tax isn’t rocket science, but it does need careful handling. If you’re advising clients or managing company finances, knowing how to identify taxable assets, calculate gains, and apply exemptions could save thousands.
Join CIBA’s Tax Happy Hour on Capital Gains Tax (CGT) on 23 July 2025 and offer better services to your clients!
What you will walk away with:
A basic overview of the mechanics, pitfalls and opportunities regarding Capital Gains Tax:
Interaction between the Income Tax Act and the 8th Schedule to the Income Tax Act.
Overview of the 4 Pillars underpinning CGT:
o Asset
o Base Cost
o Proceeds
o Disposal events
Pitfalls and opportunities.
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