Small Business Tax: Capital Gains and Dividends

Small Business Tax: Capital Gains Tax and Dividends Tax Explained for South African Business Owners

March 26, 2026•8 min read

This is article # of 5 in the Small Business Tax Series

Introduction

As your business grows, you may eventually sell assets, sell part of the business, or distribute profits to shareholders. When these events happen, two additional taxes can apply: Capital Gains Tax (CGT) and Dividends Tax.

Many small business owners are familiar with income tax because it is paid every year on business profits. However, capital gains tax and dividends tax work differently. These taxes are usually triggered by specific events, such as selling an asset or paying profits to shareholders.

Understanding these taxes is important for business owners who want to grow their companies, attract investors, or eventually sell their business. These taxes are administered by the South African Revenue Service and form part of the broader South African tax system.

In this article, we will explain what capital gains tax and dividends tax are, how they are calculated, when they must be submitted, and how they affect small business owners.

What Is Capital Gains Tax?

Capital Gains Tax (often called CGT) is a tax that applies when you sell an asset and make a profit from that sale.

In simple terms, a capital gain happens when you sell something for more than what you originally paid for it.

Assets that may trigger capital gains tax include:

Property
Business equipment
Vehicles used by the business
Investments
Shares in companies
A portion of a business that is sold

Capital gains tax is not a separate tax with its own tax return. Instead, it forms part of your income tax calculation.

This means the gain is added to your taxable income, and then normal tax rules are applied.

The purpose of capital gains tax is to ensure that profits made from selling valuable assets are also taxed, just like normal business income.

What Is a Capital Asset?

A capital asset is something that the business owns and uses over time.

Examples include:

Buildings or business premises
Machinery
Vehicles
Long-term investments
Business goodwill
Shares in other companies

These assets usually increase or decrease in value over time. When they are sold, the difference between the purchase price and the selling price determines whether there is a capital gain or capital loss.

If the asset is sold for more than the original purchase price, the business has made a capital gain.

If it is sold for less, the business has a capital loss.

Capital losses can sometimes be used to reduce future capital gains.

How Capital Gains Tax Is Calculated

The calculation of capital gains tax follows several steps.

Step 1: Determine the Base Cost

The base cost is the original value of the asset. This includes:

The purchase price
Transfer or legal costs
Improvement costs made to the asset

Example:

A business buys equipment for R100,000.

Over time, the business spends R20,000 improving the equipment.

Base cost = R120,000

Step 2: Determine the Selling Price

Next, determine the price at which the asset was sold.

Example:

The equipment is sold for R180,000.

Step 3: Calculate the Capital Gain

Capital Gain = Selling Price – Base Cost

R180,000 – R120,000 = R60,000 capital gain

Step 4: Apply the Inclusion Rate

In South Africa, only a portion of the capital gain is added to taxable income. This is known as the inclusion rate depends on the type of taxpayer.

Typical inclusion rates are:

Individuals: 40%
Companies: 80%

These rates may change, so business owners should confirm the latest information from the South African Revenue Service.

Step 5: Add the Included Gain to Taxable Income

Example for a company:

Capital gain = R60,000

Inclusion rate = 80%

R60,000 × 80% = R48,000

This R48,000 is added to the company’s taxable income and taxed according to the normal corporate tax rate.

Example of Capital Gains Tax in a Business

Imagine a small business purchased a delivery vehicle several years ago for R200,000. Later the business sells the vehicle for R260,000.

Capital gain: R260,000 – R200,000 = R60,000

If the business is a company, the included gain is: R60,000 × 80% = R48,000

This R48,000 is added to the company’s taxable income and taxed at the corporate income tax rate. Although the full R60,000 gain is not taxed, a large portion still becomes part of taxable income.

When Capital Gains Tax Must Be Declared

Capital gains tax is declared when the annual income tax return is submitted. For companies, this is part of the ITR14 corporate income tax return. For individuals (such as sole proprietors), it is included in the ITR12 personal income tax return. The gain must be declared during the tax year in which the asset was sold.

Because capital gains can significantly affect taxable income, it is important to keep accurate records of:

Asset purchase prices
Improvement costs
Sale prices
Dates of purchase and sale

Without proper records, calculating capital gains tax can become difficult.

What Is Dividends Tax?

Dividends tax applies when a company distributes profits to its shareholders. When a company makes a profit, it has several choices about what to do with that money. The company can:

Reinvest the profit back into the business
Save the profit for future expenses
Pay the profit to shareholders as dividends

Dividends represent a share of the company’s profits paid to the owners of the business. In South Africa, dividends paid by companies are usually subject to a dividends tax of 20%.

This tax is collected by the South African Revenue Service.

How Dividends Tax Is Calculated

Dividends tax is generally straightforward. The tax rate is usually 20% of the dividend amount.

Example: A company declares dividends of R100,000 to its shareholders.

Dividends tax: R100,000 × 20% = R20,000

The shareholders receive the remaining amount: R100,000 – R20,000 = R80,000

In most cases, the company withholds the tax and pays it directly to the South African Revenue Service. This means shareholders normally receive the net dividend amount after tax.

Example: Small Business Owner Receiving Dividends

Imagine a small company owned by one shareholder. The company makes a profit and decides to distribute R50,000 as a dividend.

Dividend tax: R50,000 × 20% = R10,000

The shareholder receives: R50,000 – R10,000 = R40,000

The company pays the R10,000 tax to the South African Revenue Service. This process ensures that profits distributed to shareholders are taxed.

When Dividends Tax Must Be Paid

Dividends tax is paid when the dividend is declared and distributed. The company paying the dividend is responsible for:

Withholding the tax
Submitting the dividends tax return
Paying the tax to the South African Revenue Service

The payment must normally be made by the end of the month following the month in which the dividend was paid.

Because the company handles the tax submission, shareholders often do not need to submit separate returns for the dividends themselves.

However, accurate records must still be kept.

Key Differences Between Capital Gains Tax and Dividends Tax

Although both taxes relate to profits, they apply in different situations.

Tax Type When It Applies

Capital Gains Tax When an asset is sold for a profit

Dividends Tax When a company distributes profits to shareholders

Capital gains tax relates to selling assets, while dividends tax relates to sharing profits with business owners.

Both taxes can have a significant impact on the financial planning of a business.

Practical Tips for Small Business Owners

Understanding capital gains and dividends tax can help business owners plan better.

Keep Records of Asset Purchases

Always keep documentation for assets purchased by the business.
These records will be essential if the asset is sold later.

Plan Before Selling Assets

Selling major assets can increase taxable income significantly.
Planning ahead with a tax professional can help avoid unexpected tax bills.

Understand Dividend Decisions

Paying dividends may seem like a simple way to take money out of the company, but dividends tax must always be considered.
Sometimes reinvesting profits into the business may be a better decision.

Work With an Accountant

Because these taxes involve important calculations and legal rules, working with a qualified accountant can help ensure compliance.

However, business owners should still understand the basics.

Why Business Owners Must Understand These Taxes

Capital gains tax and dividends tax are important parts of the South African tax system that affect many businesses as they grow. These taxes apply when businesses sell valuable assets or distribute profits to shareholders, and they can have a significant effect on the final amount of money a business owner receives.

Even if you rely on an accountant or tax professional to manage your tax returns, it is still important for you as the business owner to understand how these taxes work. When you understand capital gains tax and dividends tax, you can make better decisions about selling assets, reinvesting profits, or distributing dividends.

In the next article in this Small Business Tax series, we will explore another major tax that affects many businesses: Value Added Tax (VAT). VAT plays a major role in South African business transactions, and understanding how it works—including when you must register and how VAT is calculated—is essential for every growing business.