Income tax and capital gains tax
What is the difference between income tax and capital gains tax?
South African tax residents are taxed on their worldwide income and gains, irrespective of where the income and gains are earned.
Income tax, also referred to as normal tax, is levied on an individual's taxable income for a particular year of assessment (1 March until the last day of February the following year).
Taxable income is calculated by taking the income that you earn, either by way of remuneration (eg. salary from a job) or trade (eg. consulting fees for an independent consultant) and adjusting the value to take into account things such as exempt income, deductions and allowances and the taxable portion of your capital gains.
See below a basic formula to calculate taxable income.
Take your Gross Income (your salary + any consulting work) and go through each step:
| Step 1 | Subtract: | Exempt Income |
| Step 2 | Equals: | Income |
| Step 3 | Subtract: | Deductions and allowances |
| Step 4 | Add: | Inclusions in taxable income eg. taxable portion of capital gains (see below), travel allowance, etc. |
| Step 5 | Subtract: | Assessed loss brought forward from prior year |
| Step 6 | Equals: | Taxable income |
The relevant tax table for the particular year of assessment is applied to the taxpayer’s taxable income to determine his/her income tax liability.
Capital gains tax (“CGT”) is levied on gains that arise when a person disposes of an asset and the proceeds exceeds the base cost of the asset. For instance, if one had a secondary property that was rented for income and then sold that property for more than it was purchased for, a capital gain would result. CGT is not a separate tax, but forms part of income when determining a person’s tax liability.
An individual's net capital gain is all capital gains for the year of assessment, less all capital losses for the year of assessment. Only 40% of an individual’s net capital gain after deducting the annual exclusion (currently at R40 000) are included in the individual's taxable income. Therefore, an individual will essentially pay CGT at an effective rate of 0% to 18%.
Example Mr. X purchased an asset for R100 000 (base cost) and sells the asset after a period of 5 years for R500 000 (proceeds). Mr. X realised a R400 000 capital gain in the relevant year of assessment when the disposal took place. On the assumption that the aforementioned gain is the only capital gain/loss that Mr. X made in the relevant year of assessment, 40% of R360 000 (R400 000 capital gain less annual exclusion of R40 000) will be included in his taxable income (i.e., R144 000) and taxed in accordance with the tax table for the relevant year of assessment.
Disclaimer: The answers above are only applicable to individuals who are exclusively regarded as tax residents of South Africa. This is for information purposes only, and we urge clients to seek independent tax advise to ensure that your tax circumstances have been properly considered.