Real Estate Investor Magazine South Africa March/April 2020 | Page 57

Capital gains tax:
Capital gains tax (CGT) is not a separate tax but forms part
of income tax according to SARS. A capital gain arises
when you dispose of an asset for proceeds that exceed its
base cost. Capital gains are taxed at a lower effective tax
rate than ordinary income. Capital gains tax is calculated
as follows:
A net capital gain for the current year of assessment
is multiplied by the inclusion rate applicable to the
person to arrive at the taxable capital gain.
This amount is then multiplied by the applicable tax
rate to calculate the tax payable.
The CONDUIT PRINCIPLE only applies to trusts and is one
of the biggest advantages of using trusts. The South African
Institute of Chartered Accountants (SAICA) explains it as
follows: “If income accrues to a trust and the trustees award it to
one or more beneficiaries in the same year, the income retains
its nature in the hands of the beneficiary.”
This means that whatever profit the trust makes, whether it
is capital or income by nature, can be distributed to any of the
beneficiaries and the beneficiaries will pay tax in their personal
capacity. Thanks to the conduit principle, you often pay less
income tax or capital gains tax in a trust than in any other
entity. Contrary to popular belief.
Let’s look at two tax calculation examples.
EXAMPLE 1 (CAPITAL GAIN):
Let’s assume you bought an investment property for R500 000
and sold it for R900 000. The capital gain is R400 000.
Scenario 1:
You own the property in a company, and the tax rate for
companies is 28%. Therefore, the capital gains tax will be:
Even though a company is taxed at 28%, if you wish to
distribute the profits to the shareholders for personal use, an
additional 20% dividends tax will apply. This often makes it more
feasible to own your first properties directly in a trust as you can
apply the conduit principle with beneficiaries who are on low tax
brackets. Therefore, it’s clear that even though trusts have a higher
tax rate, you pay the least tax because of the conduit principle.
EXAMPLE 2 (NET PROFIT):
Now, let’s assume your property portfolio generated a net
profit (rental income minus expenses such as interest on
mortgage bonds, rental agency commissions, levies, rates and
taxes, maintenance and administration costs) of R400 000 for
the year. The previous capital gains assumptions still apply to
the following scenarios.
Scenario 1:
R400 000 (Net Profit) x 28% (Income Tax Rate) = R112 000
Total Income Tax (Using a COMPANY) = R112 000
(Effective Tax Rate: 28%)
Keep in mind that if you want to distribute these profits
to yourself, you will still need to pay an ADDITIONAL 20%
dividends tax on what you distribute.
Scenario 2:
Let’s assume you own the property in a trust, and you
have two children who need to go to university soon, and
you would like to use the profit or gain to pay for their
studies. Neither of your children earns any other income
yet. The net profit will be R200 000 (R400 000/2).
Child 1:
R200 000 (Net Profit) x 12% (Estimate Effective Tax Rate
After Rebates at an Income of R200 000) = R24 000
[R400 000 (Capital Gain) – R0 (Capital Gain Exclusion)] x
80% (Inclusion Rate) x 28% (Income Tax Rate) = R89 600
(Total Capital Gains Tax) Child 2:
R200 000 (Net Profit) x 12% (Estimate Effective Tax Rate
After Rebates at an Income of R200 000) = R24 000
Total Capital Gains Tax (Using a COMPANY) = R89 600
(Effective Tax Rate: 22.40%) Total Income Tax (Using a TRUST) = R48 000 (Effective
Tax Rate: 12%)
Keep in mind that if you want to distribute these profits
to yourself, you will still need to pay an ADDITIONAL 20%
dividends tax on what you distribute. Once again, it’s clear that even though trusts have higher
tax rates, you pay less tax because of the conduit principle. The
conduit principle allows you to distribute to any beneficiaries,
not only your children. You can also distribute to your spouse or
parents if they are on a lower tax bracket. And if you don’t have
children yet, keep in mind that your tax challenges will only come
later once your property portfolio has existed for some years.
Scenario 2:
Let’s assume you own the property in a trust, and you
have two children who need to go to university soon, and
you would like to use the profit or gain to pay for their
studies. Neither of your children earns any other income
yet. The capital gains will be R200 000 (R400 000/2).
Child 1:
[R200 000 (Capital Gain) – R40 000 (Capital Gain Exclusion)]
x 40% (Inclusion Rate) x 10% (Estimate Effective Tax Rate
After Rebates at an Income of R160 000) = R6 400
Child 2:
[R200 000 (Capital Gain) – R40 000 (Capital Gain Exclusion)]
x 40% (Inclusion Rate) x 10% (Estimate Effective Tax Rate
After Rebates at an Income of R160 000) = R6 400
Total Capital Gains Tax (Using a TRUST) = R12 800
(Effective Tax Rate: 3.20%)
Is it possible to build a property portfolio without paying tax?
The short answer is yes. You can build a huge property empire
and pay almost no tax! And this is not only applicable in South
Africa, but worldwide. It is possible to stay close to break-even,
while you experience capital growth (unrealised gains) with
your property portfolio.
Therefore, don’t ever let tax hold you back from investing in
property. You’ll miss out on the ride of a lifetime.
JACO GROBBELAAR is a property investor,
structuring specialist and international speaker.
He founded Prosperity Enterprises to help equip
individuals in building their property portfolios
through education, structuring and support.
SA Real Estate Investor Magazine MARCH/APRIL 2020
55