Capital gains tax for retirees

Although capital gains tax (CGT) applies to anyone selling a property, it is of particular interest to retirees who have owned a property for 30 or more years. Especially when that property has gained significant value due to the popularity and growth of the neighbourhood. A property bought in Camps Bay for R41,000 in 1971 may now be worth around R15 million, attracting a significant portion of CGT.

What is capital gains tax?

CGT, which was introduced in South Africa in 2001, is quite a complex piece of legislation. In essence, all taxpayers are required to pay a portion of tax on any financial gains made when selling assets. These gains relate to the ‘profit’ made since 2001 until the date of sale – thus, the selling price less the value as at 2001, less eligible costs and improvements.

As with all tax-related legislation, there are exclusions, amendments and annual changes, so one should always consult with a professional tax practitioner to ensure that you not only remain compliant, but are also using all the provisions provided.

How CGT affects retirees

For the purposes of this article we’ll assume that an individual owns a property that they use as their home, their primary residence. In this case one is immediately given an exemption for the first R2 million of capital gain made, and over and above this is an additional R40,000 annual exclusion. This is a one-off amount that cannot be accumulated or carried over from year to year.

Once the net capital gain is calculated, individuals will have 40% of that amount added to their taxable income for the year, and be taxed accordingly. Thus, a net capital gain of R1 million (after exclusions and allowable deductions) will result in R400,000 being added to the individual’s taxable income for the year. If the individual is in the highest tax bracket, the tax paid will effectively be 18% of the net capital gain, or R180,000.

Valuing your property in 2001

Although taxpayers were given until 30 September 2004 to obtain formal valuations of their properties for the purposes of CGT, many did not know about it or partake in the process. This makes valuing your property as at 2001 a little tricky.

SARS has various methods for doing this, and has defined the circumstances in which each method applies. The simplest is the time apportionment method, which looks at how long you owned the asset before and after 2001, and provides an average value.

None of the methods will accurately reflect the value of your property as at 2001, as they rely on averages based on the current value, and do not take into account growth trends, the actual property market, and other factors.

What constitutes improvements, as opposed to maintenance?

Monies paid towards renovations and improvements may be deducted from your capital gain, whereas repairs and maintenance may not. There is a little room for interpretation regarding this.

According to the Act, the test to distinguish between maintenance items and improvements is whether a new asset has been created resulting in an increase in the income-earning capacity, or whether the work simply represents the cost of restoring the asset to a state in which it will continue to earn income as before. This may seem confusing when you actually live in the house as opposed to renting it out.

Refurbishing a kitchen may increase the earning potential of your home, but it does not necessarily result in a ‘new asset’ having been created. Making structural changes or extensions does, however. In general, if you had a kitchen and now put in new cupboards, it would be considered repairs and maintenance. If you extended your kitchen and built a new pantry, then it would be an improvement.

Work that is not routine maintenance, and that increases the value and earning potential, may be considered an improvement.

What if I don’t have proof of expenses from 15 years ago?

It’s highly likely that work has been done since 2001 for which you have no proof of expenses. There is no hard rule for how to prove these expenses, but some form of proof will be required: old bank statements, emails or possibly something else. SARS will judge each case by its individual merit.

A sample CGT calculation

Looking at a property in Camps Bay purchased in 1971, we’ll use the true purchase price and current valuation, but made-up costs of improvements. Figures are rounded for simplicity.

Purchase Price (1971) R41,200
Current Value R15 million
Time apportionment value in 2011 

R9,199,630

(R15 million – R41,200) / 49 years = R305,282

R305,281 x 30 years = R9,158,460

R41,200 + R9,158,460 = R9,199,660

Renovations and improvements: R1.5 million
Commission and costs on current Sale of property: R600,000
Capital Gain: R3,700,340
Less Primary Residence Rebate: R2,000,000
Less Annual Exclusion: R40,000
Net Capital Gain: R1,660,340
Taxable portion (40%) added to the Individual’s taxable income: R664,136
Tax Paid (if individual in 45% bracket): R298,861

This example does not account for the many special clauses and conditions set out in the Act, and it is vital to consult with a specialist who can assist you in submitting the necessary calculations and documentation.