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A Fin24 reader asks:
Several years ago, I inherited a couple of hundred shares
that I would now like to sell, but I do not intend trading regularly. What are
the tax implications?
Marika Yiannakis of Sharenet writes:
Thinking about the tax implications when it comes to your
investments is an important part of dealing with your portfolio. The way you
are taxed will vary according to whether you're deemed a regular trader or a
long-term investor.
This depends on your intent – are you looking to invest for
the long term, or do you want to make a quick buck?
There is a large grey area regarding this distinction, so
the best way to figure out how you're going to be classified is to speak to a
trained tax consultant.
Capital gains tax (CGT) is the tax you pay on any profit you
make when you sell a share. Remember that there are two ways you can make a
return on an investment: through capital growth or dividends.
Before October 1 2001, South African taxpayers enjoyed a position
where all capital gains were tax-free. The Income Tax Act does not define what
a capital gain is as compared to a revenue gain.
This has resulted in numerous court cases where the taxpayer
has maintained that certain gains are capital (and therefore free of tax), with
the revenue authorities contending otherwise.
The onus is on the taxpayer to prove that gains made are not
made in the course of running a business or a profit-making scheme.
The sale of shares in a company is a classic scenario.
In some cases the gain could be of a revenue nature (for
share traders/speculators, and therefore taxed as income) or capital in nature
and therefore not taxed prior to October 2001, or now taxed at the more
favourable CGT rates.
The introduction of taxes on capital gains did not change
the rules for determining whether gains are capital or revenue in nature, but
only reduced the benefit of having a gain classified as capital.
Shareholders therefore need to be extremely vigilant when
realising assets - don't just assume that all your gains are capital in nature
and therefore taxable at the lower tax rate (maximum of 10% for private
investors).
The far higher marginal rate (40% for most private
investors) provides plenty of incentive for the South African Revenue Service
to want to tax gains as revenue.
- Fin24
