The Financial Wellness Coach: The formula for calculati…
Question: I just accepted an offer to sell my home and I’m making a profit of R3.5 million. How much capital gains tax do I have to pay if my marginal tax rate is 36%?
Kenny Meiring MBA CFP is an independent financial advisor. You can contact him at Financialwellnesscoach.co.za. Please send your questions to [email protected]
First published in Daily Maverick 168 weekly newspaper.
Answers: To calculate Capital Gains Tax (CGT) we need to know these three things:
- The capital gain.
- The inclusion rate. (I’ll explain that.)
- The tax rate.
The formula for calculating the CGT is: CGT = capital gain after deducting any exclusions x inclusion rate x your marginal tax rate.
We need to know which exclusions apply, what the inclusion rate is and what the marginal tax rate is.
If this is your primary residence, the first R2 million of capital gains will be excluded from the calculation. If it is your vacation home or you use it for rental income, all profits are taxable.
I’m assuming this is your primary residence so only R1.5 million of the R3.5 million profit is taxable.
Not all profits are taxable. If you are a natural person, only 40% is taxed. If the property is owned by a company or trust, 80% of the profits are taxed.
Marginal tax rate
Your income tax is levied in stages. The more you earn, the higher your taxes will be. The marginal tax rate is the last marginal tax rate that you deserve – it is the highest tax rate that you pay.
The CGT formula is as follows: capital gain x 40% inclusion rate x your marginal tax rate.
So you would pay: R1,500,000 x 40% x 36% = R216,000.
If you are selling a large asset like a house, try lowering your marginal tax rate. There are a few ways to do this:
When you live on the proceeds of a business, you reduce your tax year borrowings and live on a portion of the profits from the sale of your home. In the example above, if you lowered your marginal tax rate to 18%, your CGT would cut in half to R 108,000.
If you have a steady income or a pension, invest in a retirement pension (RA) to fall into a lower tax bracket.
For example, if you make R500,000 a year, your marginal tax rate is 36%. You are allowed to deposit up to 27.5% of your income into an RA. That would be the equivalent of R137,500 and reduce your taxable income to R362,500. The marginal tax rate for R362,500 would be 31%.
If you apply the new marginal tax rate to the CGT formula, you get: R1,500,000 x 40% x 31% = R186,000, which saves you R30,000.
My parents have no fortune other than their home. They bequeathed me their house worth 1 million ren. What inheritance and transfer costs am I liable for?
There is a so-called Section 4A allowance that gives each of your parents a buffer of R3,500,000 on their wealth before inheritance tax is levied. If the estate is worth less than R7 million, there is no inheritance tax on the home.
There are two other costs to watch out for when someone dies: CGT and executor’s fees.
These often surprise us as we only focus on inheritance tax. I come across many properties where these costs have not been planned and then assets need to be sold to cover them.
In your case there would be no CGT payable as it is a primary residence and the profit is less than 2 million ren.
However, the executor fees would be 4.025% x R1,000,000 = R40,250.
There is no inheritance tax on an inheritance. However, the property must be transferred in your name. This will incur transportation fees of around R20,000. DM168
This story first appeared in our weekly newspaper, Daily Maverick 168, which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest specialist dealer, please click on here.