Understanding income tax and capital gains tax

Many readers have asked about income tax, deductions and capital gains tax. Here is a very short overview of how it all works.

Peter O’Halloran - Tax advice

Income tax is levied upon the money or value of goods earned by a taxpayer who is a resident within the tax jurisdiction.

Your capital assets, money in the bank, an inheritance, loan account, and dividends due to you from a local company are all examples of capital – and capital is tax-free. Capital gains tax (CGT) is levied under a fairly narrow set of circumstances, as we’ll see shortly.

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So, salaries and rentals are taxable. But dividends from local companies or close corporations and some dividends from offshore companies are tax-free. They must, however, be disclosed as part of your gross income, which is the total of all taxable amounts earned, plus dividends and the value of so-called fringe benefits.

They must, however, be disclosed as part of your gross income, which is the total of all taxable amounts earned, plus dividends and the value of so-called fringe benefits.

Tax-free amounts – or to use the more correct term, ‘exempt amounts’ – are subtracted from gross income, and the
result is ‘income’.

If this derives from trade or business, the expenses necessary to produce this income are allowed as deductions. Once these and other deductions have been subtracted, you are left with ‘taxable income’.

The deductions allowable for retirement annuities and provident funds can be ascertained only once the taxable income is known. This is because the total amount you can deduct is limited to 27,5% of taxable income up to a maximum allowable deduction of R350 000 a year.

This is because the total amount you can deduct is limited to 27,5% of taxable income up to a maximum allowable deduction of R350 000 a year.

The tax tables are now applied and a certain amount is arrived at. Medical credits are applied and then a rebate, which depends on your age, is subtracted. Voila! This is the exact amount of taxes owed.

Capital gains tax

Interestingly, capital gains are included in the income tax calculation. So, if there has been a sale or alienation of an item of a capital nature and this item falls within the CGT net, you would include the value of the gain only in the tax calculation.

The rates or percentages used in the income tax calculation differ according to the type of entity the gain accrues to.

In this case, it is a ‘natural person’, as opposed to a ‘legal person’ such as a company, so the applicable rate is 33,3% of the gain.

CGT is not payable on antiques, small boats, microlight aircraft and certain coins and stamps. There is also a fair rebate on housing, if the house is the primary residence.

The gain is ascertained by subtracting the base cost of the asset from the net purchase consideration. This gain is multiplied by 33,3% and included in the taxable income.

Advocate Peter O’Halloran is a tax specialist.