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?

Please leave a comment and remember to share.

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.

How to close a business in South Africa

How to close a business in South Africa

Who should be reading this article? 

  • Anyone whose business is no longer trading and wishes to wind it down
  • Anyone who wants to liquidate their business
  • Anyone who has lost interest in their registered business and now wishes to discontinue it

KEY TAKE AWAY POINTS:

  1. Pay all outstanding creditors
  2. Collect from all debtors if any
  3. Cancel all contracts (ensuring that all the conditions and terms of doing so are understood and taken care off)
  4. Inform all employees and customers of the intention to close down the business
  5. Sell your business assets (including the cars) and stock (if any) or write off any assets or inventory no longer – S basically liquidate the business
  6. The last step would be to distribute any cash or assets that remain in the business
  7. Deregistering at the CIPC
  8. Deregistering with SARS (all tax numbers)

Why may you consider closing a business off?

There are many reasons for this. But, you may consider closing off your business because of any of the following reasons (not limited to this list:)

  • The business was negatively affected by COVID and there is no possibility of the business doing well again in the future
  • The business has become unprofitable and it no longer makes sense to continue operating
  • Your focus or passion has changed and you would like to focus on something else
  • The project for which the business was designed has ended and will not be resuming again in the future
  • The most profitable clients of the business have left and you do not see the business attracting any new clients
  • Changes in technology that drive your product or business out of the market
  • You no longer have the cash flow or working capital to keep the business going

If you are considering closing down your business, the following steps and considerations are important:

1. Have an exit strategy:

Truly speaking, this should happen before there is a need to close down a business. This is because we will all exit from our business one way or the other. Some of the exit reasons are what we have already highlighted above. But, it could also be due to health reasons, death, new investors, a merger or sale of the business or part of the business. Whatever the reason, every business should have an exit and succession plan in place.


Your goal here is to formulate a plan of how you will close down the business or exit from the business. Without a plan, things usually go wrong and you may be caught unaware along the way.


2. Notify your employees:

After your customers, your employees are an important asset to the business. Besides, they have families to feed and lives to live. Leaving it until late may place an unnecessary mental burden on them and leave them with little time to look for alternative employment. As an alternative, use your relationships to find then alternative employment.


But, the important point here is to keep the employees in the loop, not in the dark, about what is going on. Also, decide on who will handle the communications with the employees. It is also important to decide and communicate their terminal benefits and how these will be paid.


3. Notify your clients

It is important to notify your clients in time so that they have time to look for alternative suppliers. Also, you may need to collect anything that they still owe you. It is important that you decide how you will collect and how they will be notified.


4. Collect your outstanding debts

Plan your business closure around your existing collection policies and avoid giving new credit lines to existing or new clients.


You also want to collect any outstanding debts before you close the business because it may become difficult to get payments once you have already closed off the business. Some businesses’ financial policies do not allow payments to individuals.


Avoid announcing that you want to close off your business before you collect outstanding debts because some clients may just stall on payments hoping it will all go away.


You can offer settlement discounts to encourage customers to settle their accounts. An alternative is selling these accounts to a collecting agency.


5. Notify your creditors and pay outstanding debts

Inform your creditors of your decision to close and ensure you have a plan to handle the outstanding debts.

SARS may be one of those creditors. Ensure that you have filed all your returns and that every return is paid for. If you are unable to pay them, there are processes you can follow to ask for a compromise or a repayment plan (Click here to read more about compromises and repayment plans here.)

There may be specific laws on how you may pay your creditors. Ensure you are familiar with these and follow them in settling your creditors. If you are not sure, enlist the services of a lawyer.


6. Sell your business and operating assets 

If you can, package some of the cash-generating units that are still functional and profitable and sell these to interested parties. If this is not possible, you may want to sell the assets in the business including all the inventory, vehicles and other operating assets you may still have if there is a market available for them.


7. Deregister the business

Once you are satisfied that all processes are complete, it is now time to deregister your business with the CIPC. This is to inform the CIPC that your business is no longer in existence.


After this is done, inform SARS that you have deregistered the business. Also, apply to have all tax types (numbers) deregistered. This is to clear you of future tax compliance burden since your business is no longer in existence.


You may contact us if you need help with:

  • Company registrations
  • Tax and VAT registrations
  • Closing off your business
  • Accounting and Tax
  • Business mentorship and advisory

Can I deduct home office expenses?

Can I deduct home office expenses?

These days the work culture has changed. Since lockdown was introduced. Some companies had to close shop and some employees were required to work from home. Also and in general, the world is changing and so is the way people work and interact. Many people, like myself, prefer working from home. Working from home has become a normal thing. The GIG economy will also make working from home just another normal thing.


Luckily, SARS allows home office deductions if certain conditions are met. However, it is important to note that SARS often than not flag returns with home office expenses for audit. So it is important that one correctly and accurately claims these deductions.


It is worth understanding the rules around home office expenses as they are allowed under certain circumstances. Not everyone may end up deducting home office expenses.


Having said this, it is important to point out that the situation is different for self-employed people or what we would term sole proprietors or freelancers who work from home. These taxpayers can automatically deduct their home office expenses. These taxpayers (self-employed, sole proprietors, freelancers) do not need to work through the tight conditions required for one to be able to deduct home office expenses. They simply have to include their home office expenses with the local business, trade and professional income on their tax return.


What is required to be able to deduct home office expenses? 

  • 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 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 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.

What expenses can be deducted? 

First, one needs to check the taxpayers’ remuneration structure to see if they are:

  1. A commission earner, that is, takes more than 50% of their total remuneration from the commission or some other variable form which is based on their performance.
  2.  A normal salaried employee with variable payments/commission making up less than 50% of their total remuneration.

The commission earners can deduct the following:

  • Rent
  • Interest on bond
  • Repairs to premises
  • Rates and taxes
  • Cleaning
  • Internet
  • Wear and tear and
  • All other expenses relating to their house as well as other commission related business expenses (such as telephone, stationery, repairs to printers, maid answering phone in your absence etc)

The salaries employee with variable payments/commission making up less than 50% of their total remuneration can deduct:

  • Rent of the premises
  • Interest on the bond
  • Cost of repairs to the premises and other expenses in connection with the premises
  • Rates and taxes
  • Cleaning
  • Internet,
  • Wear and tear and all other expenses relating to their house only.

How to calculate the home office deduction: 

One would need to work out/measure the total square meterage of the office in relation to the total square meterage of the house. This is then converted into a percentage. The percentage is then used to apportion the expenses that can be used for home office deductions.


Example:

Mrs taxpayer is a software engineer who works for Corona Company Pty Ltd. Her remuneration consists of a salary only (no commission.) Her Company allows her to work from home three days per week. Mrs taxpayer has a separate office at home, fitted out with a computer and printer, which she uses exclusively for her software engineering job. Her office is 30 square meters, and the floor space of her entire home (including the office) is 300 square meters.


During the tax year, she incurs the following expenses:

– R120, 000 interest on a bond

– R36, 000 rates and electricity

– R36, 000 paid to the cleaner

– R5, 000 roof repairs

– R12, 000 cell phone expenses


Based on the above information, Mrs taxpayer qualifies for home office deduction. Based on the space occupied by her home in relation to the entire house, the apportionment ratio is 10% (30/300).


Therefore her home office deduction is 10% x (120 000 + 36 000 + 36 000 +5 000) = R19 700.

Her cell phone costs will not be deductible since she is not a commission earner.


Will I qualify for a home office deduction for the 2021 tax season? 


The 2021 tax season started 1 March 2020 and ends 28 Feb 2021. To be able to claim home office expenses you would need to have met the conditions specified earlier. You will also need to have ended up working from home for more than six months of the tax year. That is, you would have worked from home until at least the end of September 2020.


Need help claiming your home office expenses or finding someone who can deal with SARS on your behalf? Click here to contact us.

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