Tax implications for capital gains

A capital gain is a fair marker of financial success. Achieving a solid profit on a sagely-made investment usually gives good indication of business acumen.

This kind of gain does however give rise to tax implications. We approached an expert to find out what these are.

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What are capital gains?

Capital gains refer to the profit earned from a sale where an asset has increased in value. Elmar Esterhuizen, independent financial advisor at SF Advice, explains that, “A capital gain arises when you dispose of an asset for proceeds that exceed its base cost.”

As an example, if the base cost of an asset is R300,000, and the asset sells for R1,000,000, the capital gain would be R700,000.

According to Esterhuizen, the asset, or assets, in question could include real estate, shares, or unit trust investments.

How is tax applied?

The profit, or capital gain portion, of the sale of an asset is subject to capital gains tax (CGT). Esterhuizen notes that CGT is not a separate tax as such, as it is included with income tax. However, he notes, “Capital gains are taxed at a lower effective tax rate than ordinary income.”

In the example given above, the capital gain of R700,000 would be added to total taxable income, and taxed according to the individual’s marginal tax rate.

According to Esterhuizen, “The maximum effective CGT rate an individual will be charged is 18%. Therefore, when it comes to a capital gain of R700,000, an individual will be liable for paying CGT to the maximum amount to SARS. This would amount to R126,000.”

What about tax exclusions?

Esterhuizen does make note of allowable deductions, or exemptions, in the event of a capital gain. They are as follows.

• R40,000 per year for natural persons and special trusts
• R300,000 for a natural person in the year of death
• R2,000,000 for a natural person or special trust’s primary residence
• Personal assets
• Lump sums from insurance or retirement benefits