“The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital… the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy” (John F. Kennedy)
Since October 2001 South African tax residents have been liable for capital gains tax (CGT) on the disposal or “deemed disposal” of assets, such as a business or a property. Events that trigger a disposal include a sale, donation, exchange, loss, death and emigration.
For individuals, the CGT rate is a stiff 18%. No separate registration for CGT is required. Since CGT forms part of the income tax system, a person must simply declare capital gains and capital losses in the annual income tax return. All capital gains and capital losses made on the disposal of assets are subject to CGT unless excluded by specific provisions.
One of the lesser known of these exclusions offers CGT relief, for individuals older than 55, up to R1.8 million on the disposal of a small business with a market value not exceeding R10 million; or active business assets of a small business; or an interest in a small business.
The exclusion is ideal for those thinking of selling their small business to retire. Whilst, as we see below, you have to be over 55, or disposing because of retirement, infirmity, ill-health or death to actually take advantage of it, it makes sense for a business owner of any age to start planning upfront to meet the various requirements.
Of course, pages of conditions apply, and these are described briefly below to help you determine if this exception is applicable to you already, or how it can be applied to your future planning should you dispose of your small business; your shares in it; or the qualifying assets.
If you answer yes to all these questions, you may qualify for the R1.8 million CGT exclusion.
CGT is a very complex area and there are many issues to be considered.
However, not taking advantage of this exclusion if it applies to you could make a substantial difference to your future plans.
For example, let’s say you bought shares in a company 7 years ago for R2 million, and have since been actively involved in running the business. You decide to sell your share for R4 million, triggering a capital gain of R2 million.
Taxed at your marginal rate of 18%, the CGT due would amount to R360,000 (R2 million x 18%). Applying the R1.8-million exclusion, only the remaining R200,000 is taxed at 18%, reducing the CGT due to R36,000.
Take professional advice to ensure that you qualify for the maximum benefits while ticking all the compliance boxes.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.