After more than 10 years of relatively modest and unchanged Capital Gains Tax ("CGT") rates, the 2012 budget proposes an increase in the effective capital gains tax rates in order to enhance the equity, integrity and progressive nature of the South African tax system. These changes are scheduled to take effect on the disposal of qualifying capital assets from 1 March 2012.

It is proposed that the inclusion rate for individuals and special trusts will increase from 20% to 33.3%, resulting in a 13.3% increase in the effective rate with the inclusion rate for companies to increase from 50% to 66%, resulting in an effective rate increase of 18.6%. The inclusion rate for other trusts will increase to 66%, raising the effective rate to 26.7%.

As such, the tax burden on the disposal of qualifying assets has been increased significantly. This could have a detrimental impact on middle-income earners and such it is proposed that the exemption thresholds for individual capital gains and for primary residences be adjusted significantly. The following exemptions for individual capital gains are increased from 1 March 2012 -

• The annual exclusion from R20 000 to R30 000;
• The exclusion amount on death from R200 000 to R300 000;
• The primary residence exclusion from R1.5 million to R2 million;
• The exclusion amount on the disposal of a small business when a person is over the age of 55 from R900 000 to R1.8 million; and
• The maximum market value of the assets allowed for a small business disposal for business owners over 55 years increases from R5 million to R10 million.

Furthermore, it was widely expected that the highest marginal tax rate for individuals would be increased from the current 40% to cater, inter alia, for funding of National Health Insurance. Surprisingly, the 40% highest marginal rate has remained intact, but with minimal tax relief for higher income earners.

Written by Nicole Paulsen, Candidate Attorney, Cliffe Dekker Hofmeyr