Capital Gains Tax - Section 9H of the Income Tax Act, 1962 (read with the Eighth Schedule) - Layman Version

What Is Section 9H About?

• • Section 9H deals with what happens for tax purposes when:
    • • An individual stops being a South African tax resident.
      • A company stops being a resident.
      • A foreign company stops being a controlled foreign company (CFC).
      • A company becomes a headquarter company.
      • The key concept here is a “deemed disposal” – meaning SARS (the South African Revenue Service) will treat you as if you sold and re-bought your assets even though you didn’t. This triggers a capital gains tax (CGT) event.

If You’re an Individual Ceasing to Be a Tax Resident:

• • When you stop being a South African tax resident:
    • • SARS treats you as having sold all your assets the day before you ceased being a resident – at their market value.
      • You’re then treated as having re-acquired them on the same day – at the same market value.
      • Your tax year ends the day before you leave, and a new tax year starts on the day you cease residency.
      • This is called an “exit tax”, and it applies even if you haven’t physically sold anything.
      • Example: If you own shares, SARS assumes you sold them at market value just before becoming a non-resident. You may owe CGT on the “gain.”

If a Company Ceases to Be a Resident or Becomes a Headquarter Company:

• • The company is also deemed to sell and re-buy all its assets at market value.
  • The company’s tax year is split into two:
  • Ends the day before the change.
  • Starts on the day of the change.
  • If the company is paying out assets as a dividend in specie (i.e. paying shareholders with property instead of cash), SARS may treat it as if a dividend was declared and paid, and tax may apply depending on shareholder status.

If a Controlled Foreign Company (CFC) Ceases to Be a CFC:

• • When a CFC (a foreign company controlled by SA residents) stops being a CFC:
  • SARS treats the CFC as if it sold and re-acquired all its assets.
  • The foreign tax year is split into two.
  • In some cases, the change may trigger capital gains tax unless exemptions apply (e.g., certain amalgamations or liquidations).

Exceptions – What Is Not Taxed on Exit:

• • You won’t be taxed on exit for the following assets:
    • • Property located in South Africa (like your house).
      • Assets linked to a permanent business you still have in South Africa.
      • Certain shares or equity instruments that haven’t vested.
      • Retirement savings (e.g., pension or provident funds).
      • Employee share schemes where the holding period hasn’t ended.
      • These are excluded from the deemed disposal rules.

Capital Gains Deferred Earlier May Be Taxed Now

• • If your company had capital gains that were previously deferred (e.g., under share roll-over rules), they may become taxable when the company leaves SA tax residency.
  • Also, foreign dividends that were exempt under certain conditions could become taxable upon exit if they were received within 3 years before residency ends.

Shareholders Owning 10% or More

• • If you own at least 10% of a company that is ceasing SA tax residency, SARS may treat your shares as disposed of and reacquired – even if you didn’t sell them – triggering possible capital gains tax for you.
  • Currency Note:
    • • For tax purposes, SARS uses the currency you originally used to acquire the asset when calculating market value – not necessarily rands.
      • When This Doesn’t Apply
        • Section 9H doesn’t apply if:
          • • The exit is due to certain mergers (amalgamations).
            • The company is undergoing a liquidation distribution that qualifies under section 47.

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