By Tony Barrett, Wealth Manager at FNB Financial Advisory
National Treasury’s proposed plan to raise additional revenue and reduce the budget deficit has seen an increase in Capital Gains Tax (CGT), tax implications for trusts and higher transfer duties on top-end properties among other tax rate hikes.
Tony Barrett, Wealth Manager at FNB Financial Advisory says for high-net-worth South Africans, CGT implications are of particular importance as they have been a feature of the South African financial environment since 1 October 2001. He says, although the initial impact was small, with asset price increases being rather substantial, it has truly become a stealth tax in recent time.
During the February Budget, the Ministry of Finance proposed increasing the inclusion rate of capital gains from 33.3% to 40% for individuals, and from 66.6% to 80% for trusts and companies. In simple terms this means that, for individuals, 40% of all capital gains are added to that individual’s taxable income, the same principle applies for companies and trusts which now have 80% inclusion rate. For individuals and trusts the maximum marginal income tax rate remains at 41%, and for companies the tax rate is 28%.
Barrett says these numbers don’t tell the full story. “It’s only when we look at a practical example do we begin to understand the devastating effect CGT will have.”
He explains that by way of example, let us assume that on 1 October 2001 an individual and a trust each invested R100 000 in each of the following JSE-listed shares: Shoprite, Aspen, Naspers and Mr Price. What would the implications of CGT be if the shares were sold prior to 29th February 2016 under the current dispensation, and if they were sold subsequent to 1st March 2016 under the proposed new inclusion rate dispensation?
Both instances use the selling price on 24 February 2016 and the values reflected as follows:
“This jump puts many investors in a veritable no man’s land due to the debilitating effect of CGT on a portfolio’s realised value. It also constrains the flexibility and accessibility of funds. After all, as people’s circumstances and needs change at different stages of life, they will only naturally want to dispose of certain assets in order to purchase new ones that better suit their requirements. CGT never goes away, on death the deceased is presumed to have disposed of his assets the day before he passes away and his executor is required to compute the CGT owed during the winding up of the estate.
“This year’s Budget has brought home the reality of CGT as a serious tax to be reckoned with, and one that will have material impact on wealth creation of individuals, trusts and companies,” concludes Barrett.