What are the tax implications of trading or buying shares?

What are the tax implications of trading or buying shares?

The tax implication for having shares boil down to two things, whether your gain is income in nature or capital (gain) in nature. Let’s start by defining these two things:


Income: 

Shares held as trading stock are bought mainly for resale at a profit. In other words, any shares held for speculative purposes normally fall under this category. The profits or any gain or loss made on the disposal of such shares (held for-profit/speculative) purposes will be of a revenue nature and will not be subject to capital gains.


Gains of a revenue nature are subject to tax at marginal tax rates that vary between 18% and 45% depending on the circumstances of the taxpayer after taking into account all his/her other income (such as salary, rent, business income e.t.c.) The taxpayer can also deduct expenses directly related to the trading of these shares such as broker fees, transaction fees, subscription to broker news, tools and platforms and any such costs directly related to the trading of these shares.


Capital: 

On the other end of the spectrum, for shares held as a capital asset (that is as a long-term dividend producing investment,) any gains or losses arising from such shares (held for investment/dividend earning) upon disposal will be of a capital nature.


Gains that are of a capital nature are subject to capital gains and at a lower tax rate than gains of a revenue nature. Firstly, you get an exclusion of R40 000 as an individual on your gains. This means that you start paying capital gains tax if your gains exceed R40 000 for a tax year (year of assessment.) This is known as the annual exclusion. For natural persons dying during or after the 2020 tax year of assessment, the exclusion is R300 000.


In addition to the annual exclusion, 40% of the gains are included in taxable income and then taxed as the normal marginal tax rates that apply to your salaries or other income. This 40% is known as the inclusion rate. Assuming that your marginal tax rate is 45% (the highest tax bracket,) the maximum you pay on capital gains is 18% (0.4 x 0.45 = 0.18.)


Yes, you guessed it right, there can be 0% tax on your capital gains when:

  • The sum of capital gain and losses does not exceed the annual exclusion;
  • The sum of capital gain is less than or equal to the sum of capital losses (which means your gains set off against your gains); or
  • Taxable income falls below the level at which normal tax becomes payable, that is if your combined income plus gains fall under the tax-free threshold.

The effective rate (of 18%) we spoke about earlier applies if you fall in the highest tax bracket as an individual taxpayer. The rate is different from that which applies to companies or trusts. Companies and trusts, other than special trusts, pay a higher CGT than natural persons. They do not qualify for the annual exclusion and must include the capital gain at 80% of the gain into their taxable income.  These are the effective tax rates:

  • Companies are at an effective rate of 22.4% which is derived from the 80% inclusion rate and the 28% normal taxes for companies (0.28 x 0.8.)
  • A trust that is not a special trust si at 36% effective tax rate for capital gains (0.45 x 0.8)

What we have done above is the simplest way to look at share-holding. Are things that simple? Not always. The line between gains/losses of a revenue nature or gains of a capital nature can be a bit blurry.


Capital vs revenue: 

When computing your tax liability, the first step is to determine if your gains are capital or revenue in nature. Apart from the three-year rule according to Section 9C (that basically says you must own a share for at least 3 years for your gains to be treated as capital in nature,) the Tax Act itself does not provide objective rules to distinguish between gains of revenue and capital nature. This task has always been left to the courts, which over the years have established some rules for this distinction. So, the onus is on you as the taxpayer to prove that your gains are of a capital or revenue nature.


The most important factor in establishing the nature of your gains is the intention. This is not always an easy task since you can have more than one intention at a time and since intention can change over time. But, the courts have established that the taxpayer evidence as to intention must be tested against the surrounding circumstances of the case. These may include, the frequency of transactions, method of funding and reasons for selling. These may help establish your intention when you bought or sold the shares (Elandsheuwel Farming (Edms) Bpk v SBI.) “If they (the shares) were bought as a long-term investment to produce dividend income, the profit is likely to be of a capital nature. But if the shares were bought for resale at a profit, the profit will be of a revenue nature.”


In SIR v The Trust Bank of Africa Ltd it was established that for a profit to be of a capital nature, “the slightest contemplation of a profitable resale need not be excluded.

Where there were mixed intentions, the dominating intention is the one that establishes intention (COT v Levy.)


Some general guidelines/Principles (source, the SARS guide on tax implications on shares:) 

  • Any profit or loss on disposal of shares will be of a revenue nature if they were purchased for resale as part of a scheme of profit-making (Californian Copper Syndicate (Limited and Reduced) v Harris (Surveyor of Taxes)
  • A profit on the sale of shares is more likely to be of a revenue nature if it was not fortuitous, but designedly sought for and worked for (CIR v Pick ’n Pay Employee Share Purchase Trust )
  • The usual badge of fixed capital investment is that it is acquired for better or for worse, or, relatively speaking, for “keeps”, and will be disposed of only if some unusual, unexpected, or special circumstance, warranting or inducing disposal, supervened (Barnato Holdings Ltd v SIR). 
  • The scale and frequency of share transactions are of major importance, although not conclusive (CIR v Nussbaum).
  • Shares bought for the dominant, main and overriding purpose of securing the highest dividend income possible will be of a capital nature when the profit motive is incidental (CIR v Middelman).
  • Just as an occasional swallow does not make a summer, an occasional sale of shares yielding a profit does not of itself make a seller of shares, a dealer in them (CIR v Middelman).

I do not want to make this a complex matter, so let’s end here. If you need further information or guidance get in touch with me or consult your tax practitioner.

Are you learning anything from this series? Do you want to share any pointers or experiences?

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Basic deductions you can use to save on tax (how to get a tax refund)

Basic deductions you can use to save on tax (how to get a tax refund)

The tax season is offically coming to an end for non-provisional taxpayers in the next few days. But, even if you are planning for the next tax season, this article is for you as it will consider a few options/deductions that you can use to reduce your tax liability. Let’s consider these:


Medical aid credits:


Taxpayers can claim deductions (or tax credits) for medical aid schemes they contribute to. This can be applied where you contribute as a principal member or where you are not a principal member but pay for and on behalf of someone like a close family member. The credits depend on the number of beneficiaries of the medical aid. The more the beneficiaries the more the credits one can get. For the taxpayer or the first beneficiary, the tax credit is R332 for the 2022 tax year (R319 – 2021), R664 for the taxpayer and one dependant (2022 or 638 for the 2021 tax year0 and R224 for any additional beneficiary (215 for the 2021 tax year.)


Retirement annuity:


If you make contributions towards a pension, provident fund or retirement annuity, you can also claim deductions on taxable income. Taxpayers are allowed to deduct up to, from their taxable income, 27.5% of their remuneration of taxable income, whichever is greater, up to a maximum of R350 000 per tax year if they contributed to a retirement annuity fund, pension or provident fund.


Therefore, it is important that the taxpayer examines and calculate their annual contribution in order to fully take advantage of this tax benefit. However, there is no tax benefit once you withdraw from this fund (we will talk about withdrawals in another publication.)


Donations:

The taxpayer can also claim donations against his/her taxable income. There is a catch though. The deduction is limited to 10% of the taxpayer’s taxable income before claiming donations as a deduction (so, if the taxable income is R300 000, the claim cannot be more than R30 000.) The charitable organisation the taxpayer gives a donation to must also furnish the taxpayer with a Section 18A certificate, not just a receipt.


Home office expenses.

We have previously written about home expenses here. So, if you need a more detailed guide, please refer to that article. However, let’s cover a few things here too. Certain expenses that a taxpayer incur as a result of working from home can be claimed as a deduction against taxable income provided certain conditions are met:


  • The employer must allow the taxpayer to work from home. So, you can’t just work from home because you want to. Your employer must give you express permission to work from home.

  • The taxpayer must spend more than half (50%) of their total working hours working from their home office.
  • The part of the home in respect of which a claim is submitted must be occupied for purposes of a “trade”, as defined in section 1. So, in essence, there should be a specific part of the home that is used exclusively for this purpose. As an example, a specific set aside office must be kept aside for the trade. A taxpayer meeting with a client in the bar area of their home may not qualify for these deductions.
  • Building from the point above, the part that is so occupied must be specifically equipped for purposes of the trade. So, it is important that the space/office must be specially fitted with the relevant instruments, tools and equipment required for the taxpayer to perform their work.
  • The part must be regularly and exclusively used for purposes of the trade. As an example, taxpayers who earn a commission but who spend the majority of their time on the road visiting clients and performing their work at the client’s premises do not qualify for home office expense deduction.

Refer to our previous article on home office expenses for further details and examples of expenses that a taxpayer can get as a deduction for working from home.


Tax-free investments:

These accounts are offered by various financial institutions. The tax benefit is that any income (interest, dividends, REIT payments and capital gains) accrued or received from these funds are exempt from tax. For example, interest income earned is fully exempt from tax as opposed to interest earned elsewhere, which can be exempt only up to certain amounts as per the Act. Though the income is exempt, this must still be included on the taxpayer’s tax return.


Contributions to these funds should not exceed R33 000 annually and a lifetime agreement of R500 000. Any contribution above these amounts triggers a tax on the income earned.


Foreign income:

Ever heard f the 183 days rule? Individuals working overseas for a 183-day term could claim back tax deductions on income earned for the period there were outside the Republic. After 1 March 2020, the exemption is the first R1.25 million of foreign employment income earned by a resident will qualify for an exemption for tax years commencing on or after 1 March 2020.


Travel claim:

If you use your vehicle for work purposes and you are able to prove to SARS that you used your vehicle for work purposes, then you can claim a deduction on it. The catch, keep a travel logbook. Do not “manufacture one!”


Wear and tear:

The world is changing and often employees will use their own tools and equipment to carry out their work. If you are using goods/tools that you bought with your money for work purposes you are entitled to claim depreciation on these tools/assets. These can be computers or laptops. The catch, the cost of the assets must be written off over a time stipulated by SARS and you must be able to prove that the asset/tool was used for work purposes. For example, computers are written off over a period of 3 years. Assets that cost less than R7000 can be written off in full in the year of purchase.


Business expenses:

For the purposes of this article, we will treat a business as an unregistered business such as rental, sole proprietors and freelance businesses run by a taxpayer in their personal capacity. The taxpayer will get deductions for all business running costs as long as they are directly related to the business and as long as they can prove that they are business expenses. The expenses can include but are not limited to:


  • Interest on bond payments (note: not the full bond instalment)

  • Rates and taxes paid on the property
  • Water and electricity
  • Levies
  • Depreciation on furniture in the property
  • Advertising and/or rental agency fees
  • General maintenance and repairs cost like garden services, repairs and painting, cleaning services etc
  • Wear and tear
  • travel costs
  • Business running costs

Capital gains:

Individual taxpayers get an annual exclusion of R40 000 on capital gains. This means that they will start paying for CGT for any gain above R40 000. Also, only 40% of the gain is included in taxable income. If you are holding shares for investment purposes, this may be applicable to you. There can be 0% tax on your capital gains when:


  • The sum of capital gain and losses does not exceed the annual exclusion;

  • The sum of capital gain is less than or equal to the sum of capital losses 9which means your gains set off against your gains); or
  • Taxable income falls below the level at which normal tax becomes payable, that is if your combined income plus gains fall under the tax-free threshold.

For comparative purposes, CGT for individuals is smaller than it is for companies. This is important if you are going to consider holding your investment asset in your personal capacity or in a company. Individual taxpayers, assuming a higher tax bracket, pay a total of 18% on capital gains compared to 22.4% for companies.


Another very important aspect of CGT is the primary residency exclusion. “For the 2018 and 2019 years of assessment, the first R2 million of a capital gain or loss on disposal of a primary residence must be disregarded. This concession, known as the primary residence exclusion, means that most individuals will not be subject to CGT on the sale of their primary homes.”


We will discuss this concept in our future publications. For now, we just wanted to bring to your attention that you may qualify for this exclusion if you sold your primary residence.


There are various other incentives that can be applied by a taxpayer to reduce their tax liability, such as accelerated wear and tear on properties, urban development zones allowances, Section 12J, and certain investments that give the taxpayer some tax benefits. We will discuss these in our future publications to avoid an information overload.


Did you find this article helpful? Do you need help with your taxes? Give us a shout.

Timely Financial Reporting/Financial Statements preparation

Timely Financial Reporting/Financial Statements preparation

Financial statements are intended to meet the needs of decision-makers as well as providing useful information to shareholders.  As a result, the timely preparation of these reports is essential. Financial statements must be available in time to inform decision-making. Therefore, it is important that financial reports/financial statements should be published as soon as possible after the end of the reporting period.


However, we should note here that timely financial reporting should not be reduced to a well-managed “busy financial statement drafting season. Rather, ”it requires careful, yearlong planning and monitoring.  Of course, the need for timeliness has to be balanced against the need for reliability, which in addition to timeliness is also an essential characteristic of financial statements.


Requirement of the Companies Act: 

In terms of the Companies Act, Section 30, Companies are required to produce annual financial statements within 6 months of their financial year-end or within any shorter period as may be appropriate to provide the required notice of an annual general meeting in terms of section 61(7). For example, if one’s year-end of Feb 2018, they should have a set of financial statements by end of August 2018.


Recommendations: 

I would like to make the following recommendations about ways to improve the timeliness and reliability of financial reports. These recommendations are based on my personal experiences and cannot be viewed as an exhaustive list.


Do not leave it until the last time: 

It is never a good idea to start the preparation of your financial statements late on in the year. As mentioned in my introduction, the process requires careful yearlong planning and monitoring. Start with clients whose books are updated and are in order on a monthly basis. For me, these are the client I have monthly management meeting with and at each management meeting, we ensure that the accounts for that month are in order. Once we close off the accounts, we do not come back to these to make any changes. You will find that by the year-end, there is little left to do to produce the financial statements because all books are in order. For me, I find that this process ensures the ongoing completeness and accuracy of financial data.


Team collaborations: 

Reid Hoffman once said, “No matter how brilliant your mind or strategy, if you’re playing a solo game, you’ll always lose out to a team.” I cannot stress enough the importance of working as a team and ensuring that the communications among the team are good and maintained. In my firm, as an example, we have three teams that work closely together to produce financial statements; the tax team, the financial statements drafting team and the financial management team. The financial management team is responsible for day-to-day accounting and the production of the Trial balance. The tax team helps with all complex tax matters. The drafting team takes the Trial balances and produces the financial statements.  What makes the teamwork together well is communication, each member communicating whatever changes or processes that take place at any stage of the process. The biggest advantage of all this is that the reliability of the financial statements is greatly improved. The application of tax and financial reporting laws is also improved.


Systems and processes:

I also find that it helps to have proper systems and processes in place for the production of financial statements. Companies should have a financial system that they use to draft financial statements. These should be able to produce financial statements acceptable for submission with SARS and the CIPC. Also, there should be a well-defined process for the production of financial statements. It could be a well-defined checklist, which has all elements that must be checked before a trial balance is imported into the financial statements software. The presence of such a process will also go a long way in producing a reliable set of financial statements.


Closing and financial statement preparation processing: 

The annual closing process. To avoid delays, aim to have your annual close within a month from the end of the financial period. Communicate these deadlines to all people involved in the process so that everyone is aware of the deadlines and the deliverables that each should meet.


Unforeseen circumstances. The financial report preparation process may identify items that could affect the amounts reported in the financial statements, such as legal disputes, contractual obligations e.t.c. In most cases, a reasonable amount of time may be needed to resolve such items. To avoid delays, it may be better to proceed with the issuance of the financial statements based upon reasonable estimates, rather than to delay their issuance.


Planning: 

There is that old saying that says if you fail to plan, you plan to fail. It is important to carefully when for when the production of financial statements should start, and by whom the financial statements should be prepared. As mentioned earlier, do not leave the drafting to the busy drafting periods. After the year ends, aim to have at least one set of financial statements done per week. Start with those where not too much cleaning is required going to those where late adjustments and more cleaning is done. Also, you may want to aim to submit these financial statements by the time the tax season opens in July. So, plan in a way that will make this possible.


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