plan4cgt - Fundamentals - Inclusion rates/annual exclusion/admin

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"Annual exclusion”

The sum of the year’s capital gains and capital losses are added together to get to a net result. This result, whether positive (net gain), or negative (net loss), is then reduced by the annual exclusion, (it is insignificant in value). It applies only to individuals, (R10 000) special trusts, (R10 000) and deceased persons, (R50 000) - dead people do get taxed!

What it means, really, in the case of individuals, is that if the net result of your capital gains and losses on the year’s "disposals" add up to less than R10 000, there will be no CGT effect for the year. A positive result, (a net gain position),above R10 000 will be taken to the next, (and final), level of the process. At the final level the excess over the R10 000 referred to above will be multiplied by the inclusion rate and included in taxable income.

If the net gain position prior to deducting the annual exclusion is less than or equal to R10 000, nothing else happens.

If the result prior to applying the annual exclusion is negative, the excess over R10 000 will be carried forward as an “assessed capital loss”. If there are assessed capital losses brought forward from the previous year, that current year loss, to the extent that it exceeds R10 000, will be added to it.

The table below may help clarify the position-

See the example as to how CGT ties into the Income Tax Act

Also see the CGT process flowchart.

"Inclusion rates”

Capital gains are taxed at lower rates than normal income. This is true and it is thanks to the inclusion rate. In other words, only a portion of a capital gain is taxed. We use the term “capital gain” loosely in this context in that it is not each capital gain that is subject to an inclusion rate. Rather, the sum of the year’s qualifying capital gains/losses, (after the annual exclusion), less brought forward assessed capital losses will be multiplied by the applicable inclusion rate. The result is included in taxable income and will be subject to income tax.

We also refer to an effective tax rate. As a company, for example, is taxed at a normal tax rate of 30% and as its capital gain inclusion rate is 50%, it means its capital gains will be taxed at a 15% effective rate. In other words, for each R100 of normal income earned it will pay away R30 in income tax, while for every R100 of capital gain, it will pay R15 in income tax, (CGT if you like).

For individuals and special trusts the inclusion rate is 25%; meaning that only a quarter of the capital gain is taxed. For the sake of completeness, the inclusion rate on a local life insurer’s individual policyholder fund is 25% and for its untaxed fund it is O%. For everyone else, companies, trusts, etc, the inclusion rate is 50%.

"Hang on a minute” you might say, "I have heard that charities, pension funds, etc. don’t get subjected to tax on capital gains. So why is there not an inclusion rate of 0% for them?”

The answer is they are not subject CGT for other reasons. Their exemption from the tax arises not via the inclusion rate, but from the exemption, or “exclusion” mechanism in the case of a charity, and in the latter case, a pension fund is not subjected to tax via the Income Tax Act but is taxed under the Tax on Retirement Funds Act.

Effect of annual exclusion

Sum of capital gains and losses for the year.

Treatment

Positive - net gain position > R10 000

Inclusion rate applied to excess, (after offsetting the brought forward assessed capital loss), and included in taxable income.

Positive - net gain position < R10 000

Nothing - Essentially reduce to zero

Negative - net loss position > R10 000

Excess over R10 000 is carried forward as an “assessed capital loss” or added to existing “assessed capital loss”.

Negative - net loss position < R10 000

Nothing - does not create “assessed capital loss” nor will it be added to existing “assessed capital loss”.