Shares are one of the most common investment classes and form a major part of the investment portfolio of most investors. Choosing a winning share portfolio is difficult enough, so it is only natural that you want to pay as little as possible tax (be it Income Tax or Capital Gains Tax) on any gains/profits on the shares held in South Africa.
It is vitally important to understand the rules and interpretation of the laws followed by the South African Revenue Service (SARS) when evaluating the taxation on the gains made on shares in South Africa.
Events triggering Capital Gains Tax on shares in South Africa
Capital Gains Tax not only becomes payable on the sale of shares in South Africa. The following are regarded as deemed disposals of shares in South Africa that will result in Capital Gains Tax becoming payable:
- Death of person and the shares are not bequeathed to a surviving spouse, or
- Donation of shares, or
- Disposal of shares to a connected person for a consideration that could not be regarded as an arm’s length transaction, or
- Cessation of South African residency for taxation purposes, or
- Changing the nature of the shares from capital asset to trading stock.
Who will be liable to pay tax (Capital Gains Tax or Income Tax) on shares held in South Africa?
The classification of either a resident or non-resident for taxation purposes is the first step to determine the liability of tax in South Africa. Persons who are regarded as normally residents (true home) or who are physically present in South Africa according to the guidelines will be regarded as residents and liable for the payment of Capital Gains Tax on shares held in South Africa.
If you are a South African living overseas, you will be liable for the payment of Capital Gains Tax when you sell your shares in South Africa. Similarly, the ceasing of tax residency in South Africa will be regarded as a deemed disposal and will also trigger a Capital Gains Tax liability.
Non-residents are only liable for Capital Gains Tax in a couple of events, which will not form part of this discussion.
Income Tax versus Capital Gains Tax on shares held in South Africa
The second step is to determine whether gains (or profits) on shares held in South Africa will be subject to Income Tax or Capital Gains Tax, since there could be a marked difference in the taxation rate applicable, depending on whether these gains are subject to Income Tax or Capital Gains Tax in South Africa.
The test to determine whether these gains are subject to Income tax or Capital Gains Tax in South Africa can become very technical. A simplified way to describe this is by determining the intention on acquisition and disposal of the shares. If the intention is to hold the shares as a long-term investment for growth, then it will be subject to Capital Gains Tax in South Africa. If the intention is to deal on a regular basis with the shares (trading stock), it will be subject to Income Tax.
In this regard, it should be noted that the tax payable should in most cases be lower when the gain/profit is subject to Capital Gains Tax than when it will be subject to normal Income Tax.
The three-year rule in respect of Capital Gains Tax on shares held in South Africa
Section 9C of the Income Tax Act automatically deems any amount accrued (other than dividends) to be of a capital nature (i.e., subject to Capital Gains Tax) when the shares have been held for a period longer than three years.
Proceeds on shares held for a period of less than three years do not automatically become regarded as subject to Income Tax, but here the test of the intention becomes much more important in determining whether proceeds are subject to Income Tax or Capital Gains Tax.
How is Capital Gains Tax calculated?
A simplified explanation to calculate Capital Gains Tax in South Africa is as follows:
Step 1: Calculation of the capital gain/loss as follows:
Proceeds minus Base cost equals Capital gain/loss
(Proceeds – Base cost = Capital gain/loss)
The base cost would be the price paid for the shares, less any fees and commissions.
(Capital gain minus Annual exclusion) multiplied by Inclusion Rate equals Amount included in Taxable Income.
(Capital gain – Annual Exclusion) x Inclusion rate = Amount included in Taxable Income.
The Annual Exclusion for individuals and special trusts (trust for the benefit of a person with a disability) is currently R40 000. There is no Annual Exclusion for companies and other trusts. The inclusion rate for individuals and special trusts is currently 40% and for most other entities (companies and trusts) it is 80%.
This amount will then be subject to tax at the Income Tax rate applicable to that person (currently between 18% and 45% for individuals) and 45% for trusts.
Example: John makes a profit of R250 000 from the sale of shares that he purchased 4 years ago for R100 000. His current tax rate is 45%. How much Capital Gains Tax will he be liable for?
Calculation: Proceeds – Base cost = Capital gain.
R250 000 – R100 000 = R150 000.
(Gain – Annual Exclusion) x Inclusion rate = Amount included in Taxable Income.
(R150 000 – R40 000) x 40% = R44 000
Therefore R44 000 will be included in John’s taxable income.
At a tax rate of 45%, the capital gains tax payable will be calculated as follows:
R44 000 x 45% = R19 800.
Capital Gains Tax on shares in South Africa – Do I need expert help?
The short discussion above barely scratched the various aspects related to Capital Gains Tax in South Africa. For most people, this could become quite daunting, and is the help of reputable tax consultants and specialists really of the utmost importance.
Our specialists at Finglobal are ready to assist you with any questions in this regard and can take your hand to guide you through the various aspects related to the establishment of the nature of your share portfolio and the calculation of tax upon the disposal thereof.