At what point and at what rate are the proceeds from the sale of shares taxed was an issue I dealt with in this column last week.
Today I deal with whether these proceeds will be taxed at all.
Firstly it depends whether the proceeds are capital or revenue in nature. If they are capital then the proceeds will not be taxable. If they are revenue the proceeds will be taxable.
If you derive income from an asset, like dividends, it is considered capital. It will be seen as revenue if the asset is held to generate a profit.
To determine the purpose for which the asset is held, considerable weight is placed on your stated intention at the date of purchase, while you hold it, and when you sell it. On your tax return there is a section which asks if you have purchased or sold any assets, including shares, during the year.
If the taxpayer is a company or close corporation (CC) its memorandum and articles will be examined to establish its objects. If your company or CC's objects indicate that it is a share dealer, generally the proceeds from the sale of shares will be treated as revenue and taxed (after deducting the cost of the shares).
This does not mean that your company or CC cannot invest in shares in order to derive dividends. The problem will probably be to prove that specific shares are held for this purpose.
If you or your company do wish to hold shares for different purposes it may be advisable to form different entities and to put the purchases and sales in the correct entity according to the purpose for which they are held.
In addition to your stated intention or your company or CC's stated objects, the circumstances surrounding the purchase, the holding and the sale will be looked at to establish whether the stated intention is supported by the facts.
Generally if you make a one off purchase and sale as an individual, who bought with an investment intention, the South African Revenue Services (SARS) will accept that the proceeds on sale are capital and not taxable.
Similarly if you were compelled to buy shares in a specific quantity and you sold the shares you did not want, any profits will not be treated as revenue and taxable.
However, if you bought extra shares in order to sell the balance for a profit, you will be taxed on the proceeds as being revenue in nature.
SARS will be looking to see if you had a profit- making intention in relation to the shares. To establish this it will look at any mandates you have given if your shares are managed by a portfolio manager. It will also look at the scale and frequency of your transactions to establish if there is any element of continuity which indicates that you are carrying on some kind of share-dealing business.
If you are a member of a share incentive scheme operated by your employer, selling some of the shares to pay the debt which arises as a consequence of the scheme will not generally result in the proceeds from the sale being taxable.
There are clearly no hard and fast rules which will help you establish whether you will be taxed when you sell your shares. If you have doubts give the facts to an expert for analysis.