To best explain how capital gains tax (CGT) is calculated, we’ll detail each part of a single transaction.
When calculating CGT, ‘base cost’ and ‘proceeds’ are important. Base cost refers to the amount you paid for the shares. Proceeds is the amount you receive for selling your shares.
In our example, you bought 250 shares at R150 a share. Let’s assume your transaction fees and securities transfer tax amounted to 2% – R3 per share. These two amounts added together is your base cost. After holding these shares for four years, you sell them at a profit for R475 a share (proceeds).
Your CGT would be the difference between your proceeds (R475) and base cost (which is R153, R150 plus R3 fees). So in our example, the CGT would be R322 per share and R80,500 in total for all the shares.
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.
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 current example that would be R16,200.
The amount you will be taxed on, at your income tax rate, is R16,200. If your income tax rate is 31%, you will pay R5,022 CGT on the transaction.
If you bought the shares before 1 October 2001 the calculation looks a little different. Why? SARS adjusts your 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.
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 different scenarios are catered for in the tax legislation.
*Companies pay 80%
Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday. Don’t miss it!
Click here to meet the Just One Lap team at one of our live, free events.