Last week we discussed how capital gains tax was calculated in 2011. In this week’s financial planning article we are going to look at how capital gains tax will be calculated from March 2012 onwards. Remember that the calculation we’re doing is based on the individual and not on a trust or company.
Let’s first recap on what was discussed last week with regard to capital gains tax…
Capital gains tax only applies to the disposal of capital assets. ‘Capital assets’ can either be ‘physical assets’ such as property or a ‘right’. An example of a right would be something like ‘good will’ – Cash (and life insurance for that matter!) 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.
Here are the important capital gains tax changes for 2012:
- The inclusion rate for individuals has jumped from 25% to 33, 33%. This means that more of your capital gain is now being included in the tax calculation. The maximum effective rate has now risen from 10% to 13, 33% for the top tax bracket
- The inclusion rate for companies has risen from 50% to 66, 67%, making their net effective rate 18, 67%.
- The bad news for trusts is that the inclusion rate has also risen from 50% to 66, 67%. The net effective rate applicable to trusts is now a whopping 26, 67%.
- The annual capital gain/loss exclusion has increased from R20, 000 to R30, 000 for individuals and special trusts.
- The exclusion on death for individuals has risen from R200, 000 to R300, 000.
- The primary residence exclusion applicable to homes which are worth less than R2 million, is the full R2 million as before. If your primary residence is worth more than R2 million, then the exclusion has increased from R1. 5 million to R2 million, you lucky fish!
- If you happen to own an interest in a small-business where the market value of its assets are less than R10 million, and you are over the age of 55, the small-business exclusion has been increased from R900, 000 to R1, 8 million. Previously, the maximum market value of assets required to meet the small-business definition was R5 million, but this has now been increased to R10 million.
Let’s take a look at the 2012 capital gains tax calculation by way of our previous example.
In October 2001 Jan purchased a second property for R500, 000. In May 2012, 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 2012, the annual exclusion amounts to R30, 000. This means that the first R30, 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.
Let’s get on to the second part of the calculation:
- capital gain – R700, 000
- less annual exclusion – R30, 000
- equals aggregate capital gain – R670, 000 (in 2011 it would have been R680, 000)
In the third part of the calculation we determine the net capital gain:
- aggregate capital gain – R670, 000
- less assessed capital losses carried over from previous years – R0
- equals net capital gain – R670, 000 (In 2011 it would have been 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 (33, 33%):
- net capital gain – R670, 000
- multiplied by 33, 33% (R670, 000 x 33, 33% = R223, 311)
- Equals taxable capital gain – R223, 311 (In 2011 this would have only been R170, 000)
The R223, 311 capital gain is then added to taxable income in Jan’s income tax calculation for 2012 and taxed at his marginal rate.
The maximum effective rate of capital gains tax in 2012 is 13, 33% and is calculated as follows:
R100 (gain) x 33, 33% (inclusion rate percentage) x 40% (highest marginal rate of tax in 2012) = 13, 33%.
And there you have it…From the above we can see that SARS is now targeting the so-called “wealthy” among us!
In the coming weeks we’ll look at the capital gains tax situation where the disposal was as a result of death in 2011. Thereafter we’ll look at the same scenario from a 2012 perspective.
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Until next time.
The InsuranceFundi Team