Tax guru gymnastics
When calculating CGT, ‘base cost’ and ‘proceeds’ are important concepts. Base cost is the amount paid for acquiring an asset, whether the asset is shares or immovable property. Proceeds is the amount received when selling the asset in question.
How is CGT calculated?
To explain the way in which capital gains tax (“CGT”) is calculated, it’s best to use an example where each part of the transaction is singled out.
Let’s assume the following:
- You bought 250 shares at R150 a share
- The transaction fees and securities transfer tax amounted to 2% i.e. R3 per share
When you add these two amounts together, you get the base cost of your shares. In this example, the base cost is R153.
After holding these shares for four years, you sell them at a profit for R475 a share. This will be the proceeds.
Your CGT would be the difference between your proceeds (R475) and the base cost (R153). In our example, the CGT would be R322 per share. But as you bought 250 shares, the total will be R80,500.
Your annual exclusion
However, this is not the amount you’ll be taxed on. If you held these shares in your personal capacity (not via a company), SARS gives you an annual exclusion of R40,000 per year.
This means that your R80,500 is reduced by R40,000, leaving you with a taxable amount of R40,500.
The inclusion rate
Again, this is not the amount you’ll be taxed on. If you held these shares in your personal capacity, only 40% of the R40,500 is taxed. This is called the inclusion rate. In our example, that would be equal to R16,200 – and this is the amount you will be taxed on at your income tax rate. If your income tax rate is 31%, you will pay R5,022 CGT on the transaction.
Shares bought before October 2001
If you bought the shares before 1 October 2001, the calculation looks a little different as SARS adjusts the base cost to the market value of the shares on 1 October 2001. This means taxpayers aren’t subjected to CGT on the growth of assets before 1 October 2001.
Shares in lieu of dividends
If you receive shares instead of dividends, the base cost of your shares will be R0. You also won’t be paying any dividends tax.
To illustrate this scenario, let’s base our CGT calculation on 250 shares at R10 per share.
Assuming you sell all 250 shares for R475 a share after a period of 4 years, your tax payable will be R9,765.
R475 per share (proceeds) x 250 shares = R118,750
R118,750 – R0 (base cost) – R40,000 (annual exclusion) = R78,750
R78,750 x 40% (inclusion rate) = R31,500
R31,500 x 31% (income tax rate) = R9,765
These examples form the basis of any CGT calculation. However, various scenarios are catered for in the tax legislation.
Angelique Stronkhorst
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