plan4cgt - Fundamentals - Effective tax rates/Process flowchart

Higher level topic - Basic fundamentals

Also at this level - Capital assets and Intention of the taxpayer

Lower level - Inclusion rate; Annual exclusion; Administration

Lower level - Example of how CGT fits into income tax system;  Basic observations; Following year adjustments

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Table of effective rates of CGT

Column 1 - Type of taxpayer

Column 2 Inclusion rate of capital gain %

Column 3 Statutory rate of income tax %

Column 2 x Column 3 Effective rate of tax on capital gain  %

Individuals (Note 1)

25

0 to 40

0 to 10

Companies

50

30

15

Small business corporations

50

15/30

7.5/15

Branches of companies

50

35

17.5

Employment companies

50

35

17.5

Tax holiday companies

50

0

0

Unit trusts

N/A

30

N/A

Special trusts (Note 1)

25

18 - 40

4.5 to 10

Other trusts

50

40

20

Life assurers -

 

 

 

Individual policyholder fund

25

30

7.5

Company policyholder fund

50

30

15

Corporate fund

50

30

15

Untaxed policyholder fund

N/A

0

N/A

Note 1 - Individuals and special trusts

Special trusts are taxed in the same way as individuals apart from one exception - the rebates do not apply. As such, special trusts will be taxed on every rand of income earned. As far as individuals are concerned, for the tax year ending 29 February 2004, no tax is payable for taxpayers who are under the age of 65 where the taxable income is less than R30 000 per annum. For taxpayers of 65 years and over, no income tax is payable in respect of taxable income up to R47 222. (In theory all taxable income up to these thresholds is taxed at 18%, however, no tax liability arises by reason of the primary rebates and the over 65 special rebate. Examples are set out below so as to illustrate this mechanism.).

Each rand of taxable income up to R70 000 is taxed at 18%. Thereafter the rates move up progressively and after taxable income of R255 000 is reached, all taxable income will be taxed at a rate of 40%. The income tax table for the 2003/4 tax year is set out below.

Example - Person under 65 with taxable income of R30 000.

    Taxable income - R30 000

    Tax at 18 percent = R5 400.

    As the primary rebate is R5 400, no tax is payable.

Example - Person under 65 with taxable income of R30 000 prior to capital gains of R25 000.

Taxable income prior to capital gain                             30 000

Capital gain                                                    30 000

Less Annual exclusion                                10 000

Taxable capital gain                                     20 000

x Inclusion rate of 25%                                                      5 000

Taxable income                                                                 35 000

Tax at 18%                                                                           6 300

Less Primary rebate                                                           5 400

Tax payable                                                                           900

For the 65 and overs there is an additional rebate of R3 100, as such no tax would arise.

Each year a natural person and special trust is allowed to exclude the first R10 000 of capital gains. The balance of the capital gain has been taxed at an effective rate of 4.5 percent ie.R20 000 x 4.5% = R900, (the 18% tax rate on the first rand of taxable income multiplied by the 25% inclusion rate applicable to capital gains). Had taxable income prior to the capital gain been R25 000 or less, no tax would have been payable as the R30 000 threshold referred to above would not have been breached.

It should be evident that capital gains can push you into higher tax brackets. The next tax bracket, (in the 2003/4 tax year), starts at taxable income exceeding R70 000. Each rand thereafter is taxed at 25 percent. As such, if that person’s ordinary taxable income before capital gains remained at R30 000 but we increase the capital gains to R190 000, then, after applying the R10 000 annual exclusion and the 25% inclusion rate, [(R190 000 - R10 000) x 25% = R45 000], it would mean that R40 000 of the resultant R45 000 taxable capital gain would be taxed at 18% and the remaining R5 000 would be taxed at 25%. The resulting income tax would be R8 450. Within the income tax system this is dealt with as follows-

Taxable income prior to capital gain                             30 000

Capital gain                                                  190 000

Less Annual exclusion                                 10 000

Taxable capital gain                                    180 000

x Inclusion rate of 25%                                                    45 000

Taxable income                                                                 75 000

Tax @ 25% on excess over R70 000                                1 250

Tax on first R70 000 @ 18%                                            12 600

Total tax prior to rebate                                                   13 850

Less Primary rebate                                                           5 400

Tax liability                                                                         8 450

(For the 65 and overs the total rebates will be R8 500 as opposed to R5 400. In this case a R5 150 tax liability would arise.)

For a further, more complex example involving tax losses and so on, click here

 Income tax table for 2004 - Individuals and Special trusts

Taxable income

Rates of tax

up to R70 000

18% on each rand

R70 000 to R110 000

R12 600 + 25% on each rand over R70 000.

R110 000 to R140 000

R22 600 + 30% on each rand over R110 000

R140 000 to R180 000

R31 600 + 35% on each rand over R140 000

R180 000 to R255 000

R45 600 + 38% on each rand over R180 000

over R255 000

R74 100 + 40% on each rand over R255 000.

CGT Process Flowchart

Much of the terminolgy below only serves to confuse. What you really need to know is that a portion of net value of capital gains and losses for the year, (as reduced by brought forward capital losses), will be included in taxable income and taxed in the normal way. If a net capital loss result arises, that amount will be carried forward to the following year. It may only be used to offset future capital gains. The comprehensive example may clarify the position much better than this flowchart.

Format of Income Tax Act.

Gross income

Less Exempt income

= Income

Less Deductions

= Taxable income prior to 
taxable capital gain

Add Taxable capital gain

= Taxable income

Apply tax tables/statutory rate tax

= Tax liabilty prior to rebates

Less rebates

Income tax liability for the year

Disposal or deemed disposal of asset

Proceeds or deemed proceeds

Deduct base cost

Capital gain

Is it excluded or deferred?

Capital loss

Is it excluded or limited?

Is the gain attributed to somebody else?

Add all qualifying  capital gains and losses as well as gains attributed to you.

Reduce by annual exclusion if applicable

Aggregate capital 
gain Aggregate capital
loss

Deduct assessed capital loss from the prior year.

Net capital 
gain Assessed capital 
loss

Multiply by inclusion rate

Taxable capital 
gain

Carry forward to next year.

If you prefer, we have set out a numerical example of how this fits into the income tax framework.