When a property (or asset) is sold, you need to pay tax to the South African Revenue Services (SARS). When it comes to capital gains tax (CGT), the intention of the asset is very important. If the asset was bought with the intention to keep it for the long run, such as rental property, then CGT will be payable when sold.
How much rental income is tax free in South Africa? In this article, we will look at what is CGT, how the different legal structures is affected by it and how to pay less CGT.
The law governing and defining CGT in South Africa came into effect in October 2001. All individuals, trusts and companies need to pay CGT to the South African Revenue Service (SARS) when selling a property that has increased in value since it was purchased. There are however some exclusions that can be applied to primary residences – this being defined as a property that the owner lives in on a permanent basis. For the purpose of this article, we’re focusing on rental property.
SARS loves using big words to explain things, and due to the complexity of CGT, it’s worth understanding the following terms:
Remember that you don’t need to register for CGT, but forms part of your income tax.
So, let’s say you buy a rental property in 2005 for R 300 000 (the base cost). You decide to sell it in 2022 for R 400 000 (proceeds). SARS interprets the disposal of the asset as a taxable event and tax should be paid when the proceeds are more than the base costs. In short, the formula for capital gain is:
Capital gain = proceeds – base cost
The capital gain is taxable. You would had made R 100 000 gain (profit). If the property is in your own name, you get to minus R 40 000 as part of your annual exclusion, meaning only R 60 000 would be taxable capital gain that will be taxed.
It’s quite easy to split pleasure and business when investing in other asset classes. Property, on the other hand, can get very complicated. For example, you can improve your property by renovating the kitchen, building an extra room or adding a swimming pool. Projects like this can raise the potential sale value of the property and therefore can be included in the base cost when selling the property
On the other hand, what would happen if you live in your rental property for 3 years, then rent it out for 5 – and then sell it? Well, you will need to calculate the time that the property was used as a primary residence and deduct that percentage from the taxable income.
For more information on specific scenarios, you can check out the SARS article for base costs.
If a property was bought prior to the introduction of CGT, SARS introduced a complex formula to determine how much you need to pay in CGT. It uses the time-apportionment method:
Original cost + [ (proceeds – original cost) x Number of years held before 1/10/2001] /
[Number of years held before 1/10/2001 + number of years held after 1/10/2001]
Capital gains tax is payable on rental property. There are however some exclusions on property that needs to be considered:
There are three factors that are used to calculate the CGT:
The calculation for calculating CGT is:
CGT = capital gain – exclusions x inclusion rate x your marginal tax rate
Remember that for all legal entities and individuals, you can deduct the bond and transfer costs, upgrades and enhancements as part of the exclusions.
When it comes to CGT, SARS tend to favour natural persons (individuals) compared to trusts and companies. If you, therefore, have the property in your own name, you will pay less CGT.
Generally, in rental property you have to choose two of the following: liability, tax and income. If you favour tax, then having a property in your own name would be welcoming when selling. But if you favour limited liability, then a company might suffice.
The 2023 rate for individuals is a maximum of 18%, companies 21.6 % and 36 % for trusts. for those interested, we can see below an annual breakdown of CGT (from SARS) over the last few years:
| Type | 2023 | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 |
|---|---|---|---|---|---|---|---|---|---|
| Individuals and Special Trusts | 18% | 18% | 18% | 18% | 18% | 18% | 16.4% | 13.65% | 13.32% |
| Companies | 21.6% | 22.4% | 22.4% | 22.4% | 22.4% | 22.4% | 22.4% | 18.65% | 18.65% |
| Other Trusts | 36% | 36% | 36% | 36% | 36% | 36% | 32.8% | 27.31% | 26.64% |
When you work overseas, you need to determine if you’re a tax resident of South Africa. If yes, then you will need to pay tax locally. If you are considered a non-resident for tax purposes the sale of your property will be subject to a potential withholdings tax in South Africa. The attorney/agent will be forced to withhold the taxable amount.
Non-residents will pay a withholding tax when selling their property. The following percentages of tax is used:
SARS is very much interested in your intention when buying an asset. If you’re buying the property with the intention of holding it for a long-term investment (such as rental property), then you will need to pay CGT on your proceeds. If your intention is to fix and flip a property – then you will be taxed at your normal tax rate, and not pay capital gains tax.
If you’re trading as a company (a pty ltd), then you will be taxed at 28 % on all profits.
How much rental income is tax free in South Africa? It depends on your income bracket. The tax rates for individuals for the financial year 2022/2023 are below:
| Taxable income (R) | Rates of tax (R) |
|---|---|
| 1 – 226 000 | 18% of taxable income |
| 226 001 – 353 100 | 40 680 + 26% of taxable income above 226 000 |
| 353 101 – 488 700 | 73 726 + 31% of taxable income above 353 100 |
| 488 701– 641 400 | 115 762 + 36% of taxable income above 488 700 |
| 641 401 – 817 600 | 170 734 + 39% of taxable income above 641 400 |
| 817 601 – 1 731 600 | 239 452 + 41% of taxable income above 817 600 |
| 1 731 601 and above | 614 192 + 45% of taxable income above 1 731 600 |
Tax is only one of the three considerations in rental property strategy (liability, tax and profitability). Make sure that your legal structure suits your rental property strategy. If your focus is on lowering your taxable income, then it might be good to have the property in your own name to pay less CGT but doesn’t give you limited liability.
Capital gains tax is payable when disposing of assets where the intention was one of investing, rather than day-to-day income. To calculate how much capital gain you will need to pay when selling your rental property, you can use the following calculation:
CGT = capital gain – exclusions x inclusion rate x your marginal tax rate
Please make sure you use the above inclusions and exclusions, depending if you’re a company or individual.
