Capital Gains Tax

This is the 17^th edition of this blog. In this week’s edition I return to the economy. All fixes start with the economy. Without economic growth there can be no new jobs, so no lasting reduction in poverty. Without economic growth there cannot be a sustainable increase in tax paid to the government for all of its programmes – including police, justice, education, health and infrastructure.

We must simply do everything possible to encourage economic growth.

So far I have suggested measures to boost the economy by increasing labour market flexibility, by handing over title deeds to redistributed and communal land, by scrapping the minimum wage, by decreasing company (but not personal) tax and decreasing government borrowing. This week I deal with another hindrance to people investing and thus growing the economy. I am quoting largely from an article by Dr Brian Benfield in business day. Read it to see a better written version of this idea. https://www.businessday.co.za/bd/opinion/2025-08-21-brian-benfield-government-is-sabotaging-its-own-economy-by-taxing-phantom-gains/

What?

Capital gains tax must adjust for the inflation rate between when an investment is made and when it is sold.

Why?

1)        Inflation erodes the value of money

2)        No-one will invest in anything if they cannot make a positive, above inflation after tax profit on that investment.

3)        At present, if an investor, for example, buys a house in order to rent it out, (s)he will pay 20% of the difference between the cost price and the sale price as capital gains tax when selling the house. So, if they buy the house for R1m and sell it ten years later for R2m, R200 000 of that profit will be paid in tax. At the time of buying the house, R1m would buy perhaps 100 000 loaves of bread. Ten years later if inflation has averaged 6% a year, those 100 000 loaves will now cost R1.79m not R1m. The “real” profit of having money tied up for the ten years is therefore only about R210 000. After paying the R200 000 capital gains tax, the investor is left with only R10 000. It makes no sense to invest. The fair tax would be 20% of R210 000 which is R42 000, leaving the investor with R168 000 in nett after - tax profit.

4)        If inflation is slightly more or the sale price slightly lower, the investor will make an after-tax loss. This is against the principle of fair taxation.

5)        Local and international investors must decide where to invest their money. If we want them to build factories and houses in our country – we must allow them to make competitive amounts of after tax after inflation profits. We now only have about half the fixed capital formation we need to grow ourselves out of trouble.

6)        Australia does this and Brazil and India partially do it. Ask yourself – why would someone invest in SA and pay tax on inflation when they can invest in our neighbours and only pay tax on real profits.

7)        This tax affects ordinary people who are investing for their pensions – and it is not fair as it is.

8)        A small increase in capital investment leads to a multiplier effect that creates far more taxes than the reduction in the amount received from capital gains tax.

How?

An act of parliament needs to be passed adjusting the way in which capital gains tax is calculated to make it a tax on real profit not on inflated values.

Why Not?

1)        Investors make money along the way from rentals. This is true, but the way capital gains tax is now calculated, the rental is virtually the only profit – so this means that rentals need to be unnecessarily high. Even with rental income, the more the total profit, the more likely someone is to invest.

2)        Inflation is now only around 3% - so it no longer matters. This is definitely not true. Investors make investment decisions on the basis of a fraction of a percent. Paying tax on profits that are just an inflation effect and not real (in dollar terms) is a massive dis-incentive to investment.

Referendum

If you would support an amendment to the laws regarding capital gains tax to take inflation into account – give this a “like” on Facebook.