In the second part of this series, we focus on shares.
If claiming against our car allowances is the number one thing that keeps us awake at night as taxpayers, then the fear of SARS lying in wait to lay their grubby paws on the slightest gain that we make on our share investments must surely be a close second.
However, contrary to popular belief, SARS is not actually too keen to declare taxpayers to be share-dealers. The main reason for this is that although any profits may end up being taxed as income at marginal rates of tax, SARS would also end up having to chip in when it comes to losses sustained.
Of course, if you are going to go in for exotic investments such as single stock futures, options, and the like, or switch in and out of shares on a regular weekly and sometimes daily basis, then SARS will have no option but to classify you as a share-dealer.
For the most part, SARS actually wants to give us the benefit of the doubt and assume that the average person in the street actually buys shares for the purposes of holding them as a long-term investment. This is why Section 9C was introduced into the Income Tax Act.
Under the rules contained in Section 9C, any shares that have been held for a continuous period of three years or more will automatically be regarded as capital if sold subsequent to the three-year period.
This means that taxpayers do not have to go through the rigmarole of having to justify to SARS why the proceeds should be treated as capital once you have held the particular share for three years. Section 9C makes this automatic.
Section 9C applies only to shares sold on or after 1 October 2007. However, unlike the old Section 9B, it is not only listed shares that are included. Unlisted shares, investments in unit trusts, and even interests in close corporations are covered by this Section.
Why would one want to have the proceeds on disposal of shares declared as capital? The obvious answer is that the effective rate of Capital Gains Tax (CGT) is lower than that of normal income tax – 40% of your marginal rate in the case of individuals, and 80% of the normal tax rate for corporate taxpayers and trusts.
However, there are those taxpayers who deal in shares and don’t necessarily want their investments to be treated as capital. These are the speculators – those who hop in and out of the market, hoping to beat the overall indices.
Such taxpayers will not only want to deduct their losses, but also any other expenses relating to their trading activities. For example, if you make use of technical analysis software to manage your trading portfolio, you will be able to write off the initial cost over two years.
Other direct costs relating to your trading include bank charges, brokerage fees, scrip custody, telephones, and Internet connectivity. In fact, provided that you are able to prove that the expense incurred is connected to the income you earn from trading, you will be able to deduct the expense.
Capital equipment dedicated to your trading activities can be written off over the periods specified in SARS Practice Note 19. Computers can be written off over three years, and office furniture can be claimed over six years.
The proviso is that this equipment is used just about exclusively for your trading; otherwise, your claim will need to be apportioned between business and non-business usage.
However, even if you are not a trader, bear in mind that the courts have held that if you have a long-term investment portfolio, but decide to use derivatives to hedge any risk therein, any profits made on the derivatives themselves will be taxed as normal income.
This is notwithstanding the fact that their purpose is to reduce the risk of a capital portfolio.
WRITTEN BY STEVEN JONES
Steven Jones is a retired tax practitioner and member of the South African Institute of Professional Accountants
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.