If you think that capital gains tax (CGT) is something that only companies and billionaires worry about, you'd be wrong.
Yes, you do need to have fairly substantial assets for CGT to become an issue - but if you earn a fair salary, have some life assurance policies, own a car or two and a house, and have drawn up a will, then CGT will start to play a role in your annual interaction with the taxman.
However, you should not base your financial decisions on tax laws, Brian Eaton, a managing partner and tax expert at Betty & Dickson, says. He was speaking at a meeting of the ipac/Personal Finance Investors Club in Johannesburg this week.
You should rather aim to be a seasoned investor who sets up financial objectives, looks at asset allocation and then works out possible returns on investments made - with tax factored in as a cost.
There are no rules
The downside is that understanding the cost can be complicated - unfortunately, with CGT no one rule applies. There are many different types of assets, which can be held and owned in many different ways through a number of investment vehicles. All of these variations have different tax implications.
Tax Planning
The introduction of CGT on October 1 this year does not require any substantial change to your tax planning.
You can still try to figure out legitimate ways to reduce, or avoid, paying tax. You can still consider deferring tax, and you can look at different ways of paying capital into an investment.
You need to take a good look at your assets, evaluate the types of assets you own, and consider any inherent risks, as well as how the asset is held and who, exactly, owns that asset.
Asset Types
Asset types can be broadly split into cash, gilts, local and foreign equities and property, Eaton says.
Cash is subject to the same level of tax as before, gilts and bonds are not subject to tax, and local equity dividends are exempt from tax - but any capital growth on those equities are subject to CGT based on their value on October 1.
Foreign dividends will also be taxed, as will any growth from those offshore investments. With property, the primary residence that provides a shelter has an exemption .
Investment Vehicles
Investment vehicles are also going to be taxed in different ways, Eaton says. Unit trusts yielding dividends from local investments will not be taxed, but if a capital gain is made on the sale of that unit, the capital gain will be taxed. Endowment policies remain exempt from tax, but second hand endowment policies do not, and will have to comply with CGT.
Types of investor
You need to look at the different ways in which you can directly, or indirectly, own an asset. Are you recorded in a transaction as an individual, as a company or close corporation (CC) or is the holding through a trust?
An individual does have to add CGT into any equation - it will be added at a marginal rate to the normal tax payable in a year.
The company and CC tax rate has not changed, and these types of organisations will need to be aware of the effect of CGT on corporate transactions. A trust will also offer different marginal and inclusion rates.
Interest throws up another anomaly which you need to be aware of before tackling your tax returns. If you are under the age of 65, the first R4 000 in interest is exempt from CGT, and if you are over 65 the first R5000 is exempt. Also, preference shares, which have been issued for less than three years, fall under interest and are therefore subject to CGT.
Contributions to pension, provident and retirement annuity funds are subject to limited deductions, but there are still ongoing debates on this issue. Coins, artworks, containers, aircraft and boats are not subject to CGT - but if you sell them for a profit, they will be.
Working out the CGT you owe
Every capital transaction you make should be flagged, much as a company closely monitors its working capital.
You need to calculate the proceeds, or profits, from a transaction and then deduct the base cost according to the market values from October 1. Eaton points out that there are annual exclusions, but you have to look at exactly who is making the investment.
For individuals, the first R10000 in profit does not get hit with CGT, and for deceased persons the first R50 000 does not face CGT. There are no annual exclusions for companies or trusts.
Other areas where exclusions apply include assets which you would typically have in your home for personal use, retirement benefits, and long term assurances.
What you can do today
Eaton stresses that you need to have the documentation on your assets in perfect order - and don't think for a moment that you can fool the taxman. Bear in mind that unit trust management companies, and the administrators of funds, have an obligation to supply the South African Revenue Service (Sars) with detailed information about every transaction you make.
You should examine your investment vehicles and determine your CGT exposure and establish market values as of October 1.
Be sure to keep clear and detailed financial records, and examine structures which can cascade CGT, for example with companies within trusts resulting in CGT being paid more than once on the same gain.
See also Getting to grips with CGT now could save you a lot in the end