Investment Tax: How Much SARS Will Take of Your Profits
As an investor, your goal is to make money.
But being a profitable investor isn’t all a bed of roses.
Making money on the stock market means you’re going to have to share your riches with the South African Revenue Service (SARS).
So how much do you have to put into the government’s coffers?
Does the way you invest your cash make a difference to how SARS deals with your gains?
And is there any way to legally avoid paying tax on your investment gains?
Let’s delve a little deeper into one realm which many investors dread…
The Impact of Capital Gains Tax On Your Profits
If you’re investing for the long-term, your profits may be subject to capital gains tax (CGT).
This means shares you invest in for long-term capital gain, not those that you buy and sell for a quick profit. These profits would be subject to income tax.
SARS is interested in your intention when you initially invested to help determine how you pay tax on your profits.
You can read more about how SARS determines tax on investments here.
CGT covers the sale of a number of personal assets you sell for a gain.
Not only does this include the sale of shares and unit trusts, but other assets like rental property.
In the 2016 national budget address, one piece of good news surfaced in terms of CGT.
Finance minister, Pravin Gordhan, raised the capital gains threshold to R40,000 per tax year.
That’s an increase of R10,000 from last year!
To you as an investor, this means unless your profits exceed R40,000 per year, you don’t have to pay CGT.
Yet, this increase to the threshold had a sting in its tail.
In the previous tax year, SARS levied CGT at 13.65% for individuals.
This week, the finance minister raised this to 16.4%.
In other words, the tax you’ll pay on your gains is now 3.25% higher!
How CGT Works On Your Investment Gains
The first thing to remember about investment tax is that you don’t have to pay it on profits you haven’t realised.
For example, if your portfolio has risen in value, unless you sell shares, you don’t have to pay CGT.
CGT is only for profits you’ve actually made from your investment activities.
Once you decide to sell shares or other investments, there is the possibility you’re liable for CGT.
Let’s go through an example to show how CGT could affect your profits…
Tim has a portfolio well in excess of R1 million.
He decides to bank some profits from shares he owns that’ve done really well.
By selling these shares, Tim realizes a profit of R80,000.
In terms of CGT, Tim will have to pay CGT on R40,000 of those gains as the first R40,000 he makes is exempt from tax.
With the rate of CGT at 16.4%, Tim will have to pay R6,560 in CGT (16.4% of R40,000).
Of course, if Tim had sold other assets in the same tax year for a gain, his CGT liability would be higher.
Offsetting Losses Against CGT
One important aspect to bear in mind when considering the impact of CGT on your investment profits is any losses you incur.
If you sell shares or other investments at a loss in one tax year, you can offset this against profits you make.
This has the potential to lower your CGT liability.
If you have a large portfolio, it’s well worth chatting to a tax advisor when selling your investments for profit and loss.
A tax advisor will be able to help you work out the most efficient way of doing this.
What If You Only Hold Investments For The Short-Term?
SARS doesn’t view all investments equally.
It comes down to whether or not SARS deems you as a trader or an investor.
If your main goal is to make quick profits from your investments over short periods of time, SARS will more likely view you as a trader.
So what does this mean for you tax wise?
For short-term investment gains, you’re liable to pay income tax on profits you make.
If you do a bit of short-term trading, such as trading CFDs or single stock futures, and invest in shares for the long-term, your tax return may prove a bit more complex as you may be liable to pay both income tax and CGT on your gains.
If this is the category you fall into, make life easier by keeping clear records of your short-term and long-term investments.
You could even go as far as keeping separate accounts for your investing (long-term investments) and your trading (short-term investments).
Do You Have To Pay Tax On Your Dividends?
You may not realise it, but there is tax due on any dividends you receive from shares you hold.
The difference here is the company which pays you the dividend will already pay the tax for you.
The issuing company withholds 20% of the dividend amount for tax purposes.
But there is one exemption to this.
This is dividends you receive from Real Estate Investment Trusts (REITs).
REITs are subject to income tax and you’ll have to declare them on your tax return for this purpose.
How To Pay Less Tax
The government reaps the benefits of your investment success through CGT and income tax.
But there is one way to get around this...
Last year, the government introduced tax-free savings accounts.
These accounts aren’t just for saving, you can also use them to invest.
For instance, you could use your tax-free savings account to invest in unit trusts, exchange traded funds (ETFs) or government retail bonds.
You’re not liable to pay tax on any capital gains, interest or dividends from your tax-free saving account.
But there are restrictions…
The maximum amount you can invest each year is R33,000.
And this is limited to R500,000 over your lifetime.
If you invested the maximum amount each year, you’d reach the limit in 15 years.
Of course, there’s nothing to say the National Treasury won’t increase these limits at some point in the future.
In spite of the amount being relatively small for tax-free savings accounts, it’s worth putting to use.
The Benefits of Using A Tax Advisor
When it comes to all things tax, you should speak to a tax advisor, especially if you have ample investments.
A tax advisor can help you find the best way to manage selling out of investments from a tax perspective.
They might also find ways to help you save on the amount of tax you need to pay.
Spend some time looking for a tax advisor you trust.
You could ask friends and family for recommendations.
By seeking professional advice, you exclude the risk of underpaying tax.
If you end up not paying tax where it is due and SARS find out, you run the risk of investigation and fines.
Parting with your hard-earned investment profits isn’t something any investor looks forward to, but it’s not something you can avoid.
The great thing though is that if you’re a smart investor, there are ways to minimize the tax you pay.
Until then, here’s to profitable investing.
The Money Lab