How to Use the Capital Gains Tax (CGT) Annual Exclusion for Income Purposes
Submitted by: Beverley BradleyWhen most people hear the word ‘tax’, their immediate reaction is a negative one. Paying tax is certainly not a pleasurable exercise, but it is a necessary part of financial management. However, with careful planning, there are ways to manage your tax liability when you need to draw on your discretionary investments. Duann Cronje, Certified Financial Planner at Fiscal Private Client Services, explains how.
“One such management tool used in financial planning is to maximise the full benefit of your Capital Gains Tax (CGT) exclusion on an annual basis,” says Cronje. “We advise our clients to use their full exemption every year because if it is not used, it is lost.”
The South African Revenue Service (SARS) website states, “A capital gain arises when you dispose of an asset on or after 01 October 2001 for proceeds that exceed its base cost. All capital gains and capital losses made on the disposal of assets are subject to CGT unless excluded by specific provisions.”
An Annual Exclusion Explained
Cronje explains that for each year of assessment, an annual amount of R40,000 (referred to as the “annual exclusion”) of the sum of your capital gains and losses is excluded for CGT purposes. The annual exclusion increases to R300,000 in the year in which a person dies. He illustrates how to calculate the amount:
How to Calculate CGT:
- Sum of Capital Gains and Losses during the year of assessment
- Less: Annual Exclusion (R40,000)
- = Aggregate Capital Gain/Loss
- Less/Add: Assessed Capital Loss brought forward from the previous year of assessment
- = Net Capital Gain or Assessed Capital Loss
- Multiply a net capital gain by the inclusion rate of 40%
- = Taxable Capital Gain to be included in taxable income and taxed at your individual tax rate
When the Numbers Speak for Themselves
Using an example, Cronje explains that Peter is an 80-year-old pensioner who earns R10,000 p.m. from his pension and has R2,000,000 invested in a Linked Investment. He earns no other income and has no other assets. If we assume that Peter needs an additional R5,000 p.m. to cover his increased monthly expenses, he will need to withdraw R60,000 from his investments in the current tax year.
The table below shows the possible amounts Peter can withdraw from his investment, depending on how large the capital gain is as a percentage of the withdrawal amount, to ensure he pays zero CGT. We assume he has his full R40,000 exclusion available.
| Withdrawable Value | % Capital Gain | Capital Gain | Exclusion | Capital Gains Tax |
|---|---|---|---|---|
| R400,000 | 10% | R40,000 | R40,000 | R0 |
| R200,000 | 20% | R40,000 | R40,000 | R0 |
| R133,333 | 30% | R40,000 | R40,000 | R0 |
| R100,000 | 40% | R40,000 | R40,000 | R0 |
| R80,000 | 50% | R40,000 | R40,000 | R0 |
| R66,667 | 60% | R40,000 | R40,000 | R0 |
| R57,143 | 70% | R40,000 | R40,000 | R0 |
| R50,000 | 80% | R40,000 | R40,000 | R0 |
| R44,444 | 90% | R40,000 | R40,000 | R0 |
If Peter has a 70% capital gain on his withdrawals, he could draw R57,143 without incurring capital gains tax. This amount would be close to covering the R5,000 p.m. he needs for the full year. Importantly, he could access his discretionary funds with minimal to zero CGT implications, depending on the amount he wishes to withdraw.
Managing Unplanned Withdrawals
If we adjust the amount that Peter needs to withdraw for an unplanned emergency, the table below shows the estimated CGT bill for a 70% capital gain percentage:
| Withdrawable Value | % Capital Gain | Capital Gain | Exclusion | Total Gain | Taxable Gain | CGT @ 18% |
|---|---|---|---|---|---|---|
| R400,000 | 70% | R280,000 | R40,000 | R240,000 | R96,000 | R17,280 |
| R350,000 | 70% | R245,000 | R40,000 | R205,000 | R82,000 | R14,760 |
| R300,000 | 70% | R210,000 | R40,000 | R170,000 | R68,000 | R12,240 |
| R250,000 | 70% | R175,000 | R40,000 | R135,000 | R54,000 | R9,720 |
| R200,000 | 70% | R140,000 | R40,000 | R100,000 | R40,000 | R7,200 |
| R150,000 | 70% | R105,000 | R40,000 | R65,000 | R26,000 | R4,680 |
| R100,000 | 70% | R70,000 | R40,000 | R30,000 | R12,000 | R2,160 |
| R57,143 | 70% | R40,000 | R40,000 | R0 | R0 | R0 |
If Peter wants to draw R200,000, he could incur a CGT bill of roughly R7,200. This means he receives a net amount of R192,800, covering his R5,000 p.m. income need and providing a further R132,800 for emergencies. The annual allowance can be used for many reasons, but in this article, we focus on using the exclusion to supplement income.
Using the Exclusion Wisely
Cronje concludes, “It is clear that the lower your gain on your investment value, the more you can withdraw without high CGT implications. Actions that can affect your gain on investments include, but are not limited to, adding to your investments, drawing from your investments, switching funds, and selling or moving to different investment platforms.”
Disclaimer: Please seek advice from a registered tax practitioner. The above estimates are a guideline only, and the actual capital gain will depend on the market value of the investment at the time of withdrawal.
About Fiscal Private Client Services
Fiscal Private Client Services (Pty) Ltd is an authorised Financial Services Provider operating in South Africa under license number 12895 and is regulated by the Financial Sector Conduct Authority. Fiscal provides private client services to individuals, families, and corporates. Their certified financial planners use a seven-step programme to build wealth tailored to each client.
For more information, visit: www.fiscal.co.za
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