Capital Gains Tax (CGT) doesn't have to be the thorn in your side. And it doesn't have to cost you a fortune either!
The experts behind the Practical Tax Loose Leaf explain how to calculate your CGT liability in five straightforward steps.
Follow these 5 steps to calculate your CGT liability
Step 1: Calculate the base cost of the asset using one of three methods
You'll only pay tax on a portion of the profit that you make and not on the total earnings you get from the sale.
This means that you can deduct the cost of the asset (the base cost) from the proceeds of the disposal. There are three ways to reduce the proceeds of a disposal.
Step 2: Calculate your aggregate capital gain or loss
A capital gain is the amount by which the proceeds exceed the base cost.
A capital loss is when you sell an asset for less than it cost you.
You calculate the capital gain or loss separatelyfor each asset that you dispose of during a tax year.
These amounts must be added together before deducting the annual exclusion once you've calculated all individual capital gains and losses.
An aggregate capital gain is the sum of your capital gains for the tax year, less the sum of your:
- Capital losses for the year; and
- Annual exclusion for the year (which I'll discuss in a minute).
An aggregate capital loss is the sum of all your capital losses for the tax year, less your:
- Capital gains for the year
- Annual exclusion for the year.
The good news is you can take advantage of the annual exclusion, to lower your CGT bill. The annual exclusion amount is the gain that SARS lets you make, tax -free.
So if your gain is less than the exclusion amount, you won't pay any CGT on it! But for any gain you make that exceeds this amount, you only calculate the CGT on the excess
of the amount.
Individuals and special trusts are entitled to make a tax -free capital gain ofup to R30 000 for the 2013 tax year.
Where the individual dies or the special trust is terminated, the annual exclusion isup to R300 000 for the 2013 tax year.
Now that you've established the aggregate gain or loss, you can calculate the net gain or loss.
Step 3: Calculate your net gain or loss
Deduct any assessed capital losses that you've brought forward from the previous year of assessment.
This way, you offset any capital gains in the current tax year.
This is one way to shrink your CGT bill.
In theory, you can carry an assessed capital loss forward indefinitely.
Now that you know what your net gains or losses are, you need to calculate how much of it SARS will tax .
Step 4: Apply the inclusion rate to your net gain/loss, to determine how much of your total gain SARS will tax
SARS doesn't tax your whole gain – it only taxes a portion of the gain. And you calculate this portion by applying the inclusion rate to your net gain/loss.
The inclusion rates are determined by SARS.
For the 2013 tax year (ending 1 March 2013):
- 33.3% for individuals and special trusts, e.g. a Trust set up by a will, or a Trust set up for a disabled person, translating to an effective tax rate of 13.3%
- 66.6% for companies, close corporations and other trusts, e.g. an inter vivos Trust, which is effective during the life of the founder or donor. This translates to an effective tax rate of 18.6% for companies and 26.7% for other trusts.
Step 5: Calculate how much you'll owe SARS, by applying the effective CGT rate to your included amount
Once you've established how much of the gain you have to tax. apply the CGT rate to it.
That'll determine how much tax you owe SARS, on the taxable portion of the gain.