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How to work out how much tax your investments attract

by , 27 April 2017
As a business owner or shareholder, a popular way to invest is to hold or trade shares.

You hold shares to make money. Either you'll hang on to your shares for a while and reap the benefits in the form of capital growth and dividends. Or you'll look at selling short to take profits on the movement in share price.

The tax consequences hinge on whether the gains or losses you receive are of a capital or revenue nature.

But, do you know how much tax your investment attracts?

I'm going to show you how to figure it out by asking these two questions.




SARS is hungry for money. Your money.

It's teetering on the edge of around a R150 million shortfall of collected taxes... and if it fails to get this money, lights will go off, roads will crumble and water will become undrinkable.

So, SARS' only hope is to go after taxpayers with a vengeance.

But not individual taxpayers.

No. It's set its sights on corporate taxpayers, like you.

And that's why it doesn't want you to see this letter...




Answer these two questions to see how much tax you'll have to pay
  1. Did you buy the shares to resell at a profit?
  2. Did you buy the shares to hold them in the long term? 
Let's look at these in more detail.
 
Did you buy the shares to resell at a profit?
 
If you hold shares as working capital, i.e. you buy the shares mainly to resell at a profit, any gain or loss you make when you dispose of them is of a revenue nature. It's subject to income tax at the normal tax rate.
 
Did you buy the shares to hold them in the long term?
 
If you hold the shares as a capital asset, i.e. you buy them and hold on to them as a long-term dividend-yielding investment with future capital growth, any gain or loss you make when you dispose of them is of a capital nature. Only a portion (33.3% for individuals and 66.6% for companies and trusts) is subject to capital gains tax.
 
Now let's look at how you work out the tax liability of your shares.




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How to work out the tax liability of your shares
 
The first step is to figure out if the gain or loss is of a capital or revenue nature!
 
The Income Tax Act limits provisions to deal with this identification.
 
But, you can use the guidelines laid down by the South African courts over many years to help make this distinction.
 
You must see if an asset forms part of your capital structure, which you use to generate income. Or if you hold it to generate income through its resale.
 
The general principle is; the income comes from the employment of capital. This means income can't exist without capital.
 
For example, property you rent. The rental income isn't possible without the capital (property and buildings).
 
So your intention is very important when you decide between capital and revenue income.
 
For example, Theresa (who isn't a share dealer) buys shares and receives dividends on them. These dividends are of an income nature. The amount Theresa will get when she sells her shares will normally be of a capital nature.
 
In this case, Theresa will pay capital gains tax on 33.3% of her gain/loss.
 
She'll add this amount to her normal income and it will form part of her total income for income tax calculation purposes.
 
For the ins and outs of capital versus revenue, get your risk free copy of the Practical Tax Handbook.


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