When do you pay tax on direct investments on the Johannesburg Stock Exchange (JSE) and at what rate are you taxed, a reader asked me recently.
Firstly when you buy shares on the JSE you have to pay marketable securities tax as a transaction tax. This is calculated at a rate of 0,25 percent of the value of the shares you buy.
You are not liable for any other taxes if you just hold on to your shares. Dividends you receive from the shares are not taxable.
The next time you need to be concerned about tax on your shares is when you sell them. At this time the date March 18, 1992 is important. If you sold shares after this date, on the first tax return you submitted thereafter, you could have elected to have the proceeds of any shares you hold for more than five years, automatically treated as being capital in nature.
If you chose this option, all the shares you sell thereafter will be treated in this way.
Since there is no capital gains tax in this country, if the proceeds are treated as capital in nature, you will not be taxed on them.
If you previously chose to have the proceeds of shares sold after five years treated as capital, and you now want to sell shares you have held for less than five years, the proceeds will not automatically be treated as taxable revenue.
You will be in the same situation as someone who has not yet chosen to have their shares treated as capital after five years. The normal rules relating to capital and revenue will apply in deciding whether the proceeds are taxable or not.
Generally, if an asset is a capital asset it is held with the intention of earning income such as dividends on a long-term basis. A revenue asset is one which will be sold in order to earn a profit.
Thus, to use an example from case law, if you consider a tree which bears fruit, the tree is the capital which will bear the revenue-generating fruit. In relation to shares, the shares may be the tree (the investment) which will bear the fruit (the dividends). In this case the proceeds from the sale of shares will be capital in nature. However, if the shares have been bought in order to sell them at a profit, the proceeds of the sale will be viewed as being revenue in nature and therefore taxable.
Generally, you would need to consider your intention on buying, holding and selling the shares to establish whether the proceeds should be treated as capital (tax free) or revenue (taxable).
This sounds like a simple exercise, but you must remember that the onus is on you, as the taxpayer, to prove to the South African Revenue Services (SARS) that your intention was, for example, to hold the shares as an investment, and there are various criteria that the taxman will consider to establish your intention. But I'll cover those in another article.
If the proceeds are taxable the cost of the shares will be deducted from them and the balance will be added to your taxable income and taxed at your marginal tax rate. If you are only selling a part of a holding of a particular share, which you have bought in batches over a period of time, generally you will have to work out the profits on the basis of the price you paid for the first batch or batches, but under certain circumstances you may adopt a last-in-first-out method for working out the cost of the shares.