A recent judgment handed down by the Appeal Court in Bloemfontein has raised alarm bells for those grappling with the problem of tax on the proceeds of share transactions.
One of the most important tests laid down by the courts which decides whether the proceeds of a share transaction are capital (ie not taxable) or revenue (taxable) is the intention of the taxpayer at the time the shares were acquired.
According to Alister MacKenzie, a partner at KPMG's, if shares were acquired for the purposes of earning dividend income rather than to sell at a profit, then any profit on a sale would be of a capital nature, provided this intention had not changed.
"But it is important that taxpayers keep records recording the reasons for entering into particular transactions," MacKenzie said.
But a recent court judgment has added further uncertainty to this issue.
David Clegg, partner and head of the international tax division at Ernst & Young, said the Appeal Court's recent judgment in the case of CIR vs Nussbaum ruled against the taxpayer where the facts were apparently little different from a previous case, which a taxpayer had won.
In the previous case, Middleman was an investor who had a regular turnover of up to 20 percent of portfolio costs together with a few speculative transactions.
The case was won on the basis that Middleman had the intention to build a long term portfolio of sound dividend-producing shares.
Another option is to go back to the criteria that apply to corporate investors, Clegg said.
Those criteria are that there should be a low level of portfolio activity, a non-continuous portfolio review or evaluation activity; and no speculative transactions.
In other words, you need a "buy and hold" type investment strategy.