The deadline for completing valuations of property for capital gains tax (CGT) purposes has been extended by a year to September 30 2004, because too few people have had their properties valued. You may be one of those who needs a valuation. But now that the deadline has been extended don't just sit back and wait for it to come around again before you panic. Consider now whether you need a valuation, and then get it done properly.
If you owned a property before CGT was introduced on October 1 2001, then you should consider getting it valued. This is because you need a starting value, or base cost, on that date, which will enable you to determine the capital gain you have made on the property since the introduction of the tax.
People who have not yet valued homes and holiday homes they owned on October 1 2001 seem to have the following questions foremost in their minds:
- Do I really need to have a valuation performed?
- Must it be a formal valuation?
- Do I need to value my property if it is my primary residence only?
- If I do have a valuation done, must I submit it to SARS by September 30 2004? If not, won't people make up valuations at a later date?
If you don't know the answers to these questions, you may burden yourself with a future tax bill that is bigger than it needs to be.
Why? Because obtaining a valuation of your fixed property may give you the benefit of choice, which you may not have if you don't value the property before the deadline. This is because, subject to certain criteria, the CGT law allows you, in most cases, to choose between three different ways of working out the base cost as at October 1 2001. The three methods are:
- The time apportionment method - you work out what proportion of the time you have owned the property fell after CGT was introduced and apportion the total gain you have made in terms of this;
- The 20 percent of proceeds method - you simply assume that the value of the property on October 1 2001 was only 20 percent of what it is when you sell or dispose of it. (You would use this if you did not know what you spent on the property before October 1 2001.); and
- The market value method - you have your house valued as at October 1 2001 before the deadline.
If, when you sell the property, you do not have a valuation of it as at October 1 2001, you will have to use one of the first two methods to fix the base cost and hence the capital gain.
So, in answer to the first question - no, it is not compulsory to have a valuation performed. However, it would be wise to do so in order to give yourself the benefit of choice.
If you decide to have a valuation done, it need not be performed by a professional valuer. An estate agent's valuation or even your own valuation may be used. However, if you use one of these valuations when you sell the property, it is important to remember that the onus will be on you to demonstrate that the valuation is correct if the South African Revenue Service (SARS) decides to query your valuation.
It will be important to have documentation on hand showing sale prices of similar properties in the area around October 1 2001, and any other external documents that demonstrate what the property would have been valued at.
The SARS website has the official form that must be completed in order to perform the valuation.
If your only fixed property is your primary residence, then the need for a valuation will depend on two things. The first is whether you believe you will remain in the property until it is sold, bearing in mind that if it is used for any purpose other than as your primary residence before it is sold, CGT may become more of an issue than you thought.
The second factor is your view on what will happen to the value of your property by the time you sell (or die - remember CGT is triggered on the value on death).
The reason for this is that if the property is your primary residence, there is an exemption from CGT on the first R1 million of capital gain made on that property. That is, if the value of your home has not increased by more than R1 million by the time you sell it, you won't pay any CGT.
However, if you look at the prices of properties over the past 15 years, you may think again about assuming that your current home, worth say R300 000, will never increase to more than R1.3 million ... it may just be safer to get that valuation!
If you have had a valuation done, you don't have to submit it to SARS by September 30 2004, you just need to have the valuation done by then. You will submit it with your tax return for the year in which you sell it, if you are using the valuation method to calculate your base cost.
This is the case for all property valuations except those on properties worth more than R10 million. In this case you should submit your valuation to SARS with the first tax return you submit after September 30 2004.
Because in most cases you do not need to submit your valuation to SARS by September 30 2004, it is possible that people will make up valuations after that date. However, they should remember that, firstly, they will be committing fraud, which is a criminal offence, and secondly, SARS will scrutinise the valuations not performed by professional valuers very diligently and possibly disregard them if they are not realistic.
If SARS suspects you have "created" a valuation to defraud the receiver, it can levy penalties of up to three times the undeclared tax.