Capital Gains Tax (“CGT”) & your non-residential property-owning CC/PTY


This is for information purposes only – it is not updated.

Capital Gains Tax (“CGT”)
&
your non-residential property-owning CC/PTY

CGT legislation came into force on 1 October 2001.
The Amendment Bill is over 50 pages of fine-print changes to some 6 different Acts which deal in one way or another with taxation.

The lead-up to the introduction of this legislation has not been without its fair share of difficulties, whether they were issues of timing or those of viability.

Some believe, that after all is said and done, the net return to the government after implementing CGT will be a loss – i.e. the cost of administration of CGT law, with its finicky rules and regulations, will exceed the aggregate tax amount brought in by the system.

Naturally there are others who believe that South Africa needs CGT legislation, as it is hoped to form a part of a well-orchestrated package (along with the other forms of taxation, like income tax and VAT) to garner revenue for government, despite their opponents’ strong expectation that CGT will hinder much-needed capital formation and foreign direct investment.

Most capitalist or market-based economies, such as those of the so-called Western or First World have some form or another of CGT.

It appears that South Africa’s version is a less complicated form of CGT than the kind that prevails in other lands.

With the advent of an additional form of tax law, people seem to automatically think that they will be worse off. After all, this is human nature. But when properly examined, and when astutely applied, like all laws, there are ways to benefit from them, not at the expense of government, but along with government.

Imagine taking a piece of legislation and applying it in such a way that, for example, a property buyer, a seller and the SA government all score out of it!

Well that’s exactly what the new CGT law allows you to do, and naturally it is completely legal.

The following table provides a summary of how it is still more beneficial under CGT law to buy, hold and sell non-residential property in a CC/PTY rather than in your individual name (To get the sum in logical sequence, the events are not listed as they occur, but take note of the timing for clarity sake. Brackets indicate minuses or amounts paid out):

Timing
Event
Individual

Rands
CC/PTY

Rands
 

3 years later

 

Property sold

Individual sells the property for
350 000
But the buyer actually pays R378 000, being R350 000 to the seller and R28 000 on transfer duty. Buyer looses R3 000 on the deal.
CC/PTY is sold whilst owning the property for
375 000
The seller can ask for R25 000 more as the buyer is saving R28 000 on transfer duty payable if bought from the individual. Buyer scores R3 000 as inducement to buy the CC/PTY instead of from the CC/PTY where the R28 000 transfer duty would be applicable.
Now
Property bought
(250 000)
(250 000)
Now
Transfer duty
( 20 000)
( 25 000)
3 years later
CGT
Based on an annual income of the seller of the property-owning CC/PTY being, for example, R180 000.
(     –    )
( 11 520)
This CGT figure is calculated as follows:
Selling price R375 000 – R250 000 purch price = R125 000 – first R10 000 tax-free = R115 000 x 25% = R28 750 CGT portion + R180 000 salary = R208 750.
Tax on R208 750 = R66 029 – R54 509 tax on R180 000 = R11 520
3 years later
Profit after sale
& after tax
80 000
88 325

Admittedly there are administration costs to the CC/PTY, but even before the arrival of CGT such costs existed and could and can still be written off for tax purposes, further reducing your over-all tax bill!

Along with the advent of what the government hopes to be a lucrative piece of legislation – the CGT laws – government is also mounting a lively public relations campaign to get existing holders of property through CCs/PTYs to take transfer of these properties into their personal names. But be careful of following such advice. SARS would not be promoting such a move if it was not highly beneficial to themselves, and it is.

First of all, you actually lose out on over-all profit which you could make when you sell your property-owning CC/PTY – as clearly shown in the tabular example above.

Secondly you will lose the ability to claim against CC/PTY income (comprising of, say, rental from yourself, and perhaps other consulting income which the CC/PTY may have) all the deductions which the CC/PTY may in law enjoy, such as, bond interest (usually a substantial amount), water & electricity, levies, telephone, travelling expenses, stationery, etc.

Giving up the latter deductions makes more money for SARS but can see you paying a whole lot more in tax!

All things considered then, it still makes a lot of sense to buy your property in the name of a CC/PTY and to sell the CC/PTY (while it still owns the property) when you want to get rid of the property.

Also, the above example is only the tip of the iceberg. There are further ways to maximise your profit and minimise your tax when setting-up and selling your property-owning CC/PTY. For example: If your property-owning CC/PTY was originally in your spouse’s name and you were married, say, by antenuptial contract and your spouse had no source of income, then instead of making R8 325 more capital profit after tax than the individual property-seller (as in our example above), you (your spouse) would make R18 962 more and pay only R1 038 in CGT!