Capital Gains Tax on Shares – From a South African Viewpoint

What is capital gains tax (CGT)?[1]

In South Africa, capital gains tax (CGT), which is part of income tax, is payable on any financial capital gains, regardless of what type of financial assets are involved.

CGT is not a separate tax but forms part of income tax.

How to determine a capital gain or loss

Formula to calculate a capital gain or loss

The formula to determine a capital gain or loss is as follows:

CGT = Proceeds on disposal less base cost

Key aspects involved in determining a capital gain or loss

The calculation comprises four key aspects:

Assets

Generally, a South African resident’s worldwide assets are subjected to CGT, while non-residents are liable for CGT on immovable property or assets of a permanent establishment situated in South Africa.

In the context of this article, assets would be shares or options being disposed of.

Disposal

CGT is triggered on the disposal of an asset.

Events that trigger a disposal include, among others, death, loss, and emigration.

With regard to shares, a capital gain or loss is triggered when shares are disposed of in the following ways, namely when:

• the shares are sold;
• they are donated;
• a person ceases to be a resident;
• the nature of the shares changes from capital assets to trading stock;
• the shares are still owned at the time of death and were not bequeathed to a surviving spouse or an approved public benefit organisation;
• the company in which the shares are held is liquidated or deregistered; or
• a return of capital or foreign return of capital is received or accrued on or after 1 April 2012 and exceeds the base cost of the shares.

Generally, the following are examples of some of the specific exclusions concerning disposals:

• R2 million gain or loss on disposal of a primary residence;
• most personal assets;
• retirement benefits; and
• the transfer of an asset as security for a debt or the release of such security.

Proceeds

Proceeds are normally the amount received or accrued on the disposal of shares.

In the following scenarios, the proceeds will be deemed to be equal to the market value of the shares. For instance, when a person:

• donated the shares;
• died and did not bequeath the shares to a surviving spouse;
• ceased to be a resident;
• disposed of the shares to a connected person that does not reflect an arm’s-length price; or
• changed the nature of the shares to trading stock.

The proceeds are reduced by an amount that is included in gross income or which is otherwise taken into consideration in calculating taxable income. For example, if a portion of the proceeds includes a dividend.

A return of capital for CGT purposes has been treated in three different ways since October 1, 2001, depending in which period it was received, namely 1 October 2001 to 30 September 2007, 1 October 2007 to 31 March 2012, and on or after 1 April 2012.

For the purpose of this article, the focus will be on the last period.

According to paragraph 76(B)(2) of the Eighth Schedule (hereafter referred to as the Schedule) of the Income Tax Act (Act 58 of 1962) (hereafter referred to as the Act), a return of capital or foreign return of capital must be deducted from the base cost of the related share when the return occurred on or after 1 April 2012.

In addition, it is regulated that if the base cost of the share becomes negative as a result of the deduction of the return of capital or foreign return of capital, the excess is treated as capital gain. (Paragraph 76(B)(3) of the Schedule.)

Special rules apply in the following situations:

• When a return of capital or foreign return of capital is received on a share acquired before 1 October 2001, which is known as a pre-valuation date share.
• The accumulated pre-1 October 2007 returns of capital on shares held on 1 April 2012, which were previously dealt with as proceeds on a full disposal of the share, are deemed to be distributed on April 1, 2012.

Base cost

Base cost is the amount that is allowed as a deduction from the proceeds.

When some of, but not all, the shares held in a company are disposed of, the shares have to be identified according to a specific identification method. Three identification methods are allowed by SARS:

• Specific identification

Under this method, a shareholder is allowed to nominate the shares that are being sold, based on their date and cost. To be able to use this method the shareholder is obliged to maintain detailed records of the dates and costs regarding the acquisition of the shares.

• First in, first out

This method implies that a shareholder has sold the oldest shares first.

• Weighted average

Under this method, a shareholder must do the following calculations: the average cost of all the shares, the base cost of the shares disposed of, and the base cost of the remaining shares.

For example: Shareholder Rich Guy sells 400 of his 2 000 shares (value R22 400) in company BKH. The calculations will look as follows:

• Average cost of all the shares: R11.20 (R22 400/2 000).
• Base cost of the shares disposed of: R4 480 (R11.20 x 400).
• Base cost of the remaining 1 600 shares: R17 920 (R22 400 – R4 480).

The weighted average method can only be used for shares listed on a recognised exchange, such as the JSE or London Stock Exchange. Hence, it does not apply to shares in private companies. The South African Revenue Services (SARS) website provides a list of recognised exchanges.

Paragraph 33(6) of the Schedule regulates as follows with regard to the use of a identification method: ‘Once an identification method has been adopted for the first listed share disposed of on or after 1 October 2001, that method must continue to be used for the entire portfolio of listed shares. A person will be able to switch to a different method only once all the shares in the portfolio have been disposed of.’[2]

Amounts included in base cost pertaining to proceeds from shares are:

• the cost of acquisition;
• stamp duty, securities transfer tax (STT), or a similar duty or tax, actually incurred and directly related to the acquisition or disposal of the share;
• the cost of any option exercised in acquiring or selling the share (except a share taxed under section 8A or 8C) – refer note below.
• broker’s fees (whether in buying or selling a share), and
• one-third of the interest incurred to acquire a share listed on a recognised exchange or a participatory interest in a portfolio of a collective investment scheme, including money borrowed to refinance those borrowings.

However, fees paid to a portfolio manager to manage a share portfolio are not deemed a part of the base cost of a share.

When a person acquires shares from an employer under an employee incentive scheme, a special rule applies. Usually, in this situation, the base cost of the shares is the market value of the shares that were taken into account in determining any amount of the revenue gain to be included in income under section 8A or 8C. Refer note below.

Note: Sections 8A and 8C of the Act contain special rules that determine any gain or loss on shares or options acquired under an employee share incentive scheme. Section 8A regulates the period before 26 October 2004, while Section 8C explains the regulations for the period on or after 26 October 2004.

Concerning the base cost of a share acquired before 1 October 2001, known as the ‘valuation date,’ ‘fairly complex’ rules apply. It is beyond the scope of this article to explain these rules. For more information, the SARS publication, Comprehensive Guide to Capital Gains Tax, can be consulted.

How to determine a taxable capital gain or assessed capital loss

Terms explained

Before explaining the formula to calculate a capital gain or loss, the following terms need to be explained:

• Marginal tax rate: This is the amount of additional tax paid for every additional rand (ZAR) earned as income. The rate varies based on the taxpayer’s tax bracket.
• Effective tax rate: Also called average tax rate, is the actual tax rate a taxpayer pays on his or her entire taxable income. Differently put, the effective tax rate is the percentage of taxable income that a taxpayer pays in taxes.
• Annual exclusion: This is the annual amount of the sum of a taxpayer’s capital gains and losses that is excluded for CGT purposes. The exclusion for the 2025/2021 tax year for a natural person is R40 000. For a natural person dying during the year of assessment, it increases to R300 000.

Companies and trusts (other than special trusts) do not qualify for the annual inclusion.

• Inclusion rate: This is the percentage of the net capital gain that is included in a taxpayer’s taxable income and taxed at the marginal rate in the same way as other taxable income.

Tax rates

Marginal tax rates for individual taxpayers

2021 (1 March 2025 – 28 February 2025)

2020 (1 March 2019 – 29 February 2025)

Marginal tax rates for companies and trusts (Other than special trusts)

Companies: 28% (For 2025 and 2025 tax years.)

Trusts: 45% (For 2025 and 2025 tax years.)

Special trusts: Are subject to the same marginal tax rates as a natural person.

CGT rates for the current tax year (February 2025 year-end)

It was the same for the three previous tax years.

The effective rate on a natural person’s capital gain in a tax year can vary between 0% and 18%. It will only be 18% when a taxpayer’s marginal tax rate is 45%. (45% (marginal rate) x 40% (inclusion rate) x R100 = 18%.) Another example, if the marginal rate is 31%, the effective CGT rate will be 12.40% (31% (marginal rate) x 40% (inclusion rate) x R100 = 12.40%).

Formula to calculate a capital gain or loss

Sum of capital gains and losses during the assessment year, after inclusion of exclusions, roll-overs, and limitations

Less: Annual exclusion

= Aggregate capital gain or loss

Less/add: Assessed capital loss brought forward from previous year of assessment

= Net capital gain or assessed capital loss

Multiply a net capital gain by the applicable inclusion rate

= Taxable gain to be included in taxable income.

When the end result is an aggregate capital loss, it will be carried forward to the following year of assessment as an assessed capital loss.

An assessed capital loss for the year of assessment occurs when:

• an assessed capital loss brought forward from the previous year of assessment exceeds an aggregate capital gain for the year of assessment; or
• there is an aggregate capital loss for the year, in which case the assessed capital loss is equal to the aggregate capital loss plus any assessed capital loss brought forward from the previous year of assessment.

Furthermore, an assessed capital loss:

• reduces an aggregate capital gain;
• increases an aggregate capital loss;
• can never be set off against ordinary income;
• once established, is not again reduced by the annual exclusion in future years.

Example of calculating taxable gain

Given:

Mr. Nobody is a natural person and his share portfolio delivered the following results during the 2025/2021 year of assessment:

Capital gains on the shares of the following companies:

R

MMH Ltd                                                                                                                                         70 000

SAH Ltd                                                                                                                                             55 000

GMV Ltd                                                                                                                                           45 000

170 000

Capital loss on shares of SMH Ltd                                                                                               (20 000)

At the end of the 2019/2020 year of assessment mr. Nobody had an assessed capital loss of R17 000.

Calculation:                                                                                                                                          R

Capital gains on shares                                                                                                                  170 000

Capital loss on shares                                                                                                                     (20 000)

Sum of capital gains and losses during assessment year                                                         150 000

Less: Annual exclusion                                                                                                                    (40 000)

Aggregate capital gain                                                                                                                     110 000

Less: Assessed capital loss brought forward from previous year of assessment                  (17 000)

Net capital gain                                                                                                                                   93 000

Inclusion rate (40% for a natural person)

Taxable capital gain (40% x R93 000) – to be included in taxable income                                37 200

Gain or loss – of a capital or revenue nature?

The first step, and an essential one at that, in determining a person’s tax liability on a disposal of shares is to determine whether the gain or loss is of a capital or revenue nature.

Revenue gains are taxed at much higher effective rates in comparison with capital gains. The maximum effective tax rates for the two types of profits differ considerably. For instance:

In addition, capital gains tax also enjoys the benefit of the annual exclusion and the inclusion rate.

The departure point in the process of distinguishing between a capital gain and a revenue profit regarding shares in section 9C of the Income Tax Act. Simply put, section 9C specifies that any amount received or accrued or any expenditure incurred in respect of an equity share will be deemed of a capital nature if that equity share had, at the time of the receipt or accrual of the amount or incurred expenditure, been held for at least three years.

The application of section 9C is by default and compulsory.

The actual challenge to decide whether the gain is from a capital or revenue nature is when the profit was generated from the disposal of shares held for less than three years. The Act does not provide objective rules in this regard.

However, South African courts have, over many years, put guidelines into place. Especially in respect of the intention of the person when the shares were bought or sold, as perceived from, among others, the following court rulings:

• the intention of the person when the shares were bought or sold, is the most important factor in determining the nature of the profit, capital, or revenue;
• if the shares were bought as a long-term investment to generate dividend income, the gain is likely to be of a capital nature;
• if the shares were bought in order to resale them for a profit, the profit will be deemed non-capital; and
• if shares were acquired with mixed intentions, the taxpayer’s intention will be determined by the dominant or main purpose.

[1] Refer to the publication, Tax Guide for Share Owners (7th issue, 21 February 2025), of the South African Revenue Services (SARS) for an extensive discussion of CGT on shares. This article is mainly based on this publication.

[2] Accentuations in citations are by the article writer.