The implications of Capital Gains Tax on property transactions

The first, most important, point to understand about Capital Gains Tax on property transactions is the difference between capital and revenue. So, for example, rent from a property, or interest on savings, are clearly revenue that is taxed in the normal way. However, although the proceeds from the sale of a property would also be revenue, the sale might instead be classified as a capital gain transaction.

Bill Rawson of the Rawson Property Group explains it this way: if the property was acquired with the intention of making a profit, the proceeds from its sale would, obviously, be revenue. However, if it was bought to provide accommodation, or as a financial investment, the proceeds from its sale would count as capital.

These distinctions seem fairly clear, he says, but SARS have occasionally taken different stances here, leaving some taxpayers confused. In general, the onus lies with the taxpayer to prove that certain sums are capital not revenue. Compiling this proof, adds Rawson, is always worthwhile because, generally, capital gains are taxed at a lower rate than revenue – and here the taxpayer's declared “intention” in purchasing the asset is paramount.

In cases where his intentions are mixed – eg to provide accommodation and to rent out for part of the year, this is acceptable to SARS, but when property owners regularly buy and sell properties, SARS are entitled to, and almost certainly will, see this as a trading activity, the profits from which will be taxed as revenue. If, however, the owner clearly intends to keep a property for long-term capital growth, SARS will see the eventual “profit” from its disposal as a capital gain.

SARS, adds Rawson, will also probably want to know the way in which the asset was bought. If it was acquired by means of a short-term loan, SARS will probably take the view that the buyer had no intention of holding onto it for long-term capital gain.

Where the property is for the buyer's own use, eg a “primary” home, the Capital Gains Tax exemptions will apply, within certain limits – for example, the first R3,5-million gain on a “primary” home is Capital Gains Tax exempt. However, owners who use part of the home for business may be subject to different tax structures. “In general,” says Rawson, “SARS have proved to be extremely reasonable and approachable, but it is certainly worth establishing the difference between revenue and capital gain early on so as to keep tax to the minimum possible level.”

– Compiled from a RE/MAX Press Release, IOL Property News.