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
Tax season deductions: Basic deductions you can use to save on tax (how to get a tax refund)
Tax season deductions – what you should know 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 year 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
Effective Steps to Successfully Close a Business in South Africa (Guide)
Effective Steps to Successfully Close a Business in South Africa: CIPC and SARS Deregistration Guide (2026) Quick Answer: How Do You Close a Business in South Africa? To close a registered company in South Africa, you must first determine whether it qualifies for voluntary deregistration or requires a formal liquidation process. For a company that has stopped trading and has settled its assets and liabilities, the closure process generally involves: Reviewing the company’s financial position. Collecting outstanding customer payments. Settling creditors and other liabilities. Addressing employee and contractual obligations. Disposing of business assets and stock appropriately. Finalising accounting records and outstanding tax returns. Applying for CIPC deregistration where eligible. Cancelling the relevant SARS tax registrations and other employer registrations. Retaining the required business records. Important: Simply stopping trading does not automatically close a company or end its tax obligations. The correct process depends on whether the company is solvent, has outstanding debts or still owns assets. 1. What Is the Difference Between Deregistration and Liquidation? Before closing a business, it is essential to understand the distinction. Deregistration Liquidation Generally appropriate for a company that has ceased trading and meets CIPC eligibility requirements Formal winding-up process for a company with assets or liabilities requiring administration Removes the company from the CIPC register Involves the legal administration and winding-up of the company’s affairs Usually simpler where all affairs have been finalised Usually involves additional legal procedures and a liquidator Does not provide a lawful shortcut for avoiding creditors Provides a formal process for dealing with creditors and distributing assets Subject to CIPC requirements and objection procedures May apply to solvent or insolvent companies under different legal procedures CIPC also provides for certain deregistration situations involving insufficient assets to justify liquidation. These cases require careful consideration, particularly where liabilities remain. A company can therefore be solvent and still require a formal winding-up process. 2. Why Would Someone Decide to Close a Business? Business owners may decide to close their companies for several reasons. These include: Continued financial losses. Insufficient cash flow or working capital. Retirement or a change in career. Completion of a specific project. Changes in market conditions. Loss of major customers. Technological changes affecting the business. A decision to focus on other investments or businesses. Shareholder or ownership changes. A business that was registered but never commenced trading. Not every struggling business needs to close. Depending on the circumstances, restructuring, selling the business or negotiating with creditors may be possible alternatives. 3. Start With a Business Closure Plan A structured closure plan helps business owners identify outstanding responsibilities before beginning the deregistration process. Start by preparing a current financial position. Review: Bank balances. Trade receivables. Trade payables. Outstanding loans. Inventory. Vehicles and equipment. Tax liabilities. Employee obligations. Existing contracts. Shareholder loans. Other assets and liabilities. This information helps determine whether the business can settle its debts and whether deregistration or liquidation is appropriate. Example: Assessing a Company’s Financial Position Suppose a company has the following position: Description Amount Cash available R40,000 Customer balances recoverable R80,000 Estimated net proceeds from assets R100,000 Total estimated available resources R220,000 Trade creditors R90,000 SARS liabilities R30,000 Other liabilities R40,000 Total liabilities R160,000 Estimated surplus before closure expenses, additional taxes and other adjustments: R60,000 This suggests that the company may have sufficient resources to settle its recorded liabilities. However, it does not establish that the company is legally solvent or that deregistration can begin immediately. The company must still consider contingent liabilities, asset realisability, tax consequences and the appropriate closure procedure. 4. Notify Employees and Comply With Labour Legislation If your business employs staff, closure may involve retrenchments or other lawful termination arrangements. Employers must consider the Labour Relations Act, including the applicable consultation requirements for dismissals based on operational requirements. Depending on the circumstances, obligations may include: Consultation with affected employees. Consideration of alternatives to dismissal. Appropriate notice. Statutory severance pay where applicable. Outstanding remuneration. Accrued leave payments. UIF documentation. Relevant employment certificates and records. Example: Severance Pay Under the general statutory minimum for qualifying operational-requirements dismissals, severance pay is at least one week’s remuneration for each completed year of continuous service, subject to applicable legal provisions. Suppose an employee earns R5,000 per week and has completed four years of continuous service. Illustrative minimum severance: R5,000 × 4 = R20,000 Other termination payments may also be payable. Important: The calculation of remuneration, eligibility for severance and any applicable exceptions must be assessed under the relevant employment legislation. Business closure does not automatically remove an employer’s labour-law responsibilities. 5. Inform Customers and Review Existing Contracts Customers should receive appropriate notice where the business can no longer provide products or services. Review outstanding contractual obligations, including: Customer agreements. Supplier agreements. Property leases. Equipment rentals. Software subscriptions. Insurance policies. Service agreements. Finance contracts. Some agreements may contain notice periods, cancellation charges or other termination provisions. Do not assume that closing the company automatically cancels its contractual obligations. 6. Collect Outstanding Debtors Before closing the business, review all outstanding customer accounts. Prepare a debtors age analysis showing: Amounts outstanding. Due dates. Overdue balances. Disputed invoices. Potentially irrecoverable debts. Where appropriate, follow up with customers and consider lawful collection arrangements. Why Is This Important? Outstanding debtors are company assets. If a company still has recoverable receivables, it may not yet satisfy the requirements for straightforward voluntary deregistration. Uncollected balances should therefore be properly addressed before the company is closed. 7. Settle Creditors and Outstanding Liabilities A business must properly address its liabilities before pursuing a closure process. These may include: Suppliers. Banks and finance providers. Employees. Landlords. SARS. Shareholder loans. Other creditors. Where the company cannot pay its debts, directors should seek professional advice on the appropriate legal process. Do not distribute remaining cash to shareholders while ignoring outstanding creditors. What If the Business Owes SARS? Depending on the circumstances, SARS may permit a qualifying taxpayer to apply for a payment arrangement or compromise of tax debt. These are formal processes subject to statutory requirements and SARS approval. They
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: 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. 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? Leave a message Subscribe now: