Last week in financial planning you were briefly introduced to capital gains tax. This week we are going to look at how capital gains tax was calculated in 2011. Next week we’ll look at how things work in 2012.
The first thing you need to know is that capital gains tax only applies once a capital asset is disposed of. Capital assets can either be ‘physical assets’ such as property or a ‘right’. What’s a right? A right would be something like ‘good will’ in a business. Also remember that neither cash nor insurance is not a capital asset!
A ‘disposal’ might be the ‘actual physical disposal’ of the capital asset by sale or it could be the ‘deemed disposal’ of an asset. An example of a deemed disposal would be death of the owner (which is a topic for another day).
What’s important is that a capital gain or capital loss must be determined for each asset that you dispose of during any one tax year. Total capital gains are then offset against total capital losses resulting in a net gain or net loss.
Let’s take a look at the capital gains tax calculation by way of an example.
In October 2001 Jan purchased a second property for R500, 000. In May 2011, Jan sold the property for R1, 2 million.
Here is how the first part of the calculation works:
- proceeds – R1, 200, 000
- less base cost – R500, 000
- equals capital gain – R 700, 000
From this capital gain we now deduct any ‘exclusions’ or defer any ‘rollovers’. In 2011, the annual exclusion amounted to R20, 000. This means that the first R20, 000 of any gain or loss is excluded from the capital gains tax calculation. An example of a ‘rollover’ would be when an asset is transferred to a spouse in terms of a donation or a bequest in a will.
Still with me? Good! Let’s get on to the second part of the calculation:
- capital gain – R700, 000
- less annual exclusion – R20, 000
- equals aggregate capital gain – R680, 000
In the third part of the calculation we determine the net capital gain:
- aggregate capital gain – R680, 000
- less assessed capital losses carried over from previous years – R0
- equals net capital gain – R680, 000
In the fourth part of the calculation we work out the taxable capital gain by multiplying the net capital gain by the inclusion rate applicable to individuals (25%):
- net capital gain – R680, 000
- multiplied by 25% (R680, 000 x 25% = R170, 000)
- Equals taxable capital gain – R170, 000
Note that the inclusion rate applicable to companies, close corporations, and trusts is 50%.
The R170, 000 capital gain is then added to taxable income in Jan’s income tax calculation for 2011 and taxed at his marginal rate.
The maximum effective rate of capital gains tax in 2011 was 10% and is calculated as follows:
R100 (gain) x 25% (inclusion rate percentage) x 40% (highest marginal rate of tax in 2011) = 10%.
Next week we’ll bring the good news regarding 2012.
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Until next time.
The InsuranceFundi Team