Capital Gains Tax (CGT)

Capital Gains Tax

A Lesson Context

Income Tax applies to trade income. Capital Gains Tax (CGT) applies to the profit made when you dispose of a "Specified Asset". It is governed by a separate Act, the Capital Gains Tax Act [Chapter 23:01].

B What is a "Specified Asset"?

CGT rules only apply to:

  1. Immovable Property: Land, buildings, houses, farms.
  2. Marketable Securities: Shares, stocks, debentures (whether listed or unlisted).

Example: Selling a personal car, furniture, or jewellery is NOT subject to CGT (though business assets might trigger Income Tax recoupment).

C Determining the Capital Gain

The tax is calculated on the Capital Gain, not the gross sales price.

Gross Capital Amount (Selling Price)
(-) Selling Expenses (Agent Commission, Valuation Fees, Advertising, Transfer Fees)
(-) Cost of Acquisition (Original Purchase Price)
(-) Cost of Improvements/Additions (e.g., adding a new room)
(-) Inflation Allowance (2.5% of Cost per year)
(=) Capital Gain

Tax Rate: Generally 20% of the Capital Gain. (Verify current Finance Act, as rates for pre-2019/2024 assets sometimes differ).

Inflation Allowance: This is a deduction to account for inflation. Currently calculated as 2.5% of the purchase price (or improvement cost) for each year (or part thereof) that the asset was held.

D Key Exemptions (Section 10)

  • Principal Private Residence (PPR) - Elderly: Sale of a PPR by a person aged 55 years or older.
  • Spousal Transfers: Transfer of assets between spouses.
  • Deceased Estates: Sale of assets by the executor to pay estate duty (limited scope - mainly transfers to heirs are exempt).

Important: Even if exempt, you usually need to file a return to get a Tax Clearance Certificate (required for Deeds transfer).

E Rollover Relief (Section 21)

If you sell your Principal Private Residence (PPR) and use the proceeds to buy or build a New PPR, you can elect to defer the tax.

  • The gain is "rolled over" and deducted from the cost of the new house.
  • You must typically purchase the new house within the same tax year or the subsequent year.

F Case Law Integration

Elandsheuwel Farming vs SBI

Change of Intention: A company bought land for farming (Capital Asset) but later subdivided and sold it as plots (Trading Stock). The court held that the intention had changed to a profit-making scheme, so the proceeds were subject to Income Tax, not CGT. (Income Tax rates are usually higher!).

G Common Pitfalls

Repairs vs Improvements

Painting a house is a "Repair" (Non-deductible for CGT). Building a new garage is an "Improvement" (Deductible for CGT). Do not mix them up.

Clearance Certificates

You cannot transfer title deeds at the Deeds Office without a CGT Clearance Certificate. Start the process early.

H Knowledge Check

Scenario: Mrs. Sibanda (60 years old) sells her main house (PPR) for $100,000. She bought it for $20,000 years ago. Does she pay CGT?

Calculation: Calculate the Inflation Allowance: Cost $10,000. Held for 4 years. Rate 2.5%.

Attempt these before checking the answers below.

I Quiz Answers & Explanations

A1: No. She is over 55 and it is her Principal Private Residence. The sale is Exempt from CGT.

A2: $1,000. Calculation: $10,000 * 2.5% * 4 years = $1,000 allowance to be deducted from the gain.

J Key Takeaways

  • Scope: Immovable Property and Listed/Unlisted Shares.
  • Rate: Generally 20% on the Gain.
  • Exemptions: Elderly (55+) on PPR are the most common.
  • Procedure: Clearance Certificate is mandatory for transfer.

Continue Your Learning

Next: Important Case Law
Legal precedents that shape tax.