within three years and it’s revenue (trading) longer and it’s for capital growth (investing), and the difference is huge.
Investing for growth means that profits are taxed as a capital gains tax (CGT), which is 33% of your marginal tax rate (maximum in 40%) making the top end a 13.3% tax on profits. Further, the first R30 000 of capital gain is exempt from tax. Another important point is that CGT came into effect 1 October 2001, and if you bought a share before that date the price on 1 October 2001 will be used as the purchase price. As already mentioned, tax is only liable when you sell so that stock sitting on a massive gain is not taxable until you sell.
Trading is a little more complicated and expensive. Essentially it is deemed to be of revenue or income and so is taxed at your marginal tax rate (maximum 40%). But as it is revenue you are able to deduct the costs which would be any expenses incurred in achieving the income. This could include brokerage, admin fees, losses incurred in individual trades and the like. Here you need to keep solid records of all costs, which you would deduct from your profitable trades leaving the final taxable amount.
Another important point is how funds are taxed. If you buy into a unit trust, exchange-traded fund, hedge fund and the like, you are taxed when you sell. The benefit is that the fund does not pay any tax on its transaction and the ultimate tax liability is yours when you exit (assuming it is at a profit). This means that not only do you effectively defer the tax payment, but if you hold for three years while the fund is trading, it means that you would still only pay CGT on the profits. This is a huge advantage as the average trader is paying the higher marginal tax rate every year.
A last point is that the onus is on you to declare your profits from trading and investing when you submit your tax return, and as always excellent records are very important – as is solid advice from an expert or SARS official.
Simon Brown is a Finweek contributor and heads justonelap.com, a free resource of financial information and investment education.