Increase in capital gains tax inclusion rate

Together with the increase in the dividend tax rate from 10% to 15%, the increase in the capital gains tax (CGT) inclusion rate was one of the big surprises of the 2012 Budget.

Since the introduction of CGT in 2001 no changes have been made to the CGT inclusion rate which was as follows, up and until 29 February 2012:

  1. Individuals: 25%
  2. Companies and trusts: 50%

Any disposal of assets from the 1st of March 2012 will result in the following CGT inclusion rates:

  1. Individuals: 33.33%
  2. Companies and trusts: 66.67%

The effect of the changes in the CGT inclusion rate could be shown best by the following examples:

Individuals: Until 29 February 2012 an amount of R25 was subject to income tax at the tax rate applicable to the individual (based on his taxable income per the tax tables) if the taxpayer realised a capital gain of R100. At a maximum tax rate of 40% an amount of R10 was paid as tax on the R100 capital gain which results in an effective tax rate of 10%.

With effect from the 1st of March 2012 the effective tax rate increases to 13.3% which results in additional tax of R33 300 being paid per R1 million capital gain realised. 

Companies: Until 29 February 2012 an amount of R50 was subject to income tax at a tax rate of 28% if the company realised a capital gain of R100. An amount of R14 was paid as tax on the R100 capital gain which results in an effective tax rate of 14%.

With effect from the 1st of March 2012 the effective tax rate increases to 18.67% which results in additional tax of R46 700 being paid per R1 million capital gain realised.

Trusts: Until 29 February 2012 an amount of R50 was subject to income tax at a tax rate of 40% if the trust realised a capital gain of R100. An amount of R20 was paid as tax on the R100 capital gain which results in an effective tax rate of 20%.

With effect from the 1st of March 2012 the effective tax rate increases to 26.67% which results in additional tax of R66 680 being paid per R1 million capital gain realised.

It is important to notice that non-South African residents owning property in South Africa will also be adversely affected by the increase as non-residents are required to pay CGT on the disposal of any immovable property owned by them in South Africa.

Furthermore,  from an estate planning perspective it becomes even more important to consider the transfer of your growth assets to a trust in order to mitigate adverse tax consequences on death.

We therefore highly recommend that an expert be consulted in order to ensure that your estate is structured in the most tax friendly way possible.

Should you require any further information on the effects of the increase in the CGT inclusion rate or the structuring of your current estate, please contact Boet Lubbe or Pieter Aucamp on 021 840 1600, or at respectively boet@asl.co.za or pieter@asl.co.za.

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