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CGT on the sale of a farm which has a primary residence on it

19 February 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: Can someone advise me on how CGT works when a cattle farm is sold and the homestead was a primary residence?

A: Where the primary residence is situated on land that is larger than two hectares (such as a cattle farm), paragraph 46 Eighth Sch ITA states that the primary residence exclusion still applies but only to the extent that the land:

  • Does not exceed 2 hectares;
  • Is used for domestic purposes (e.g. surrounding gardens etc but excluding land used for farming purposes); and
  • Is disposed of at the same time. No apportionment method is prescribed and per clause 11.5.4. of SARS’

CGT Guide the method adopted must be  logical and fair. In our view it would be reasonable to use a similar calculation as used in in para 33 Eighth Sch ITA as one of the methods available. This would result in apportioning the base cost and proceeds on the same ratio as the private residence is to the total farm on sale. For example, if the 150 hectare  farm with the house (1 hectare fenced for gardens etc.) was bought in 2002 for R1.5m and it is sold in 2015 for R10m and  a valuation is obtained that the house + 1 hectare garden has a market value of R1.5m, then the proceeds of R10m can be apportioned of the basis of R1.5m as a ration of R10m and the R1,5m base cost on the same basis to determine the capital gain against which the primary residence exclusion can be applied.

Please note that if the property was used for non-residential purposes as well during the period it was held, such as for rental purposes, the primary residence exclusion must be apportioned for this rental period per paragraph 49 Eighth Sch ITA.

http://www.sars.gov.za/AllDocs/OpsDocs/Guides/LAPD-CGT-G01%20-%20Comprehensive%20Guide%20to%20Capital%20Gains%20Tax%20-%20External%20Guide.pdf

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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