Keep your side of the tax deal clean

Finweek English Edition - - INSIDE - si­

It is tax sea­son and as much as we moan about pay­ing tax in the trad­ing and in­vest­ing space, tax is a re­sult of suc­cess. In short, no prof­its mean no tax, so only those mak­ing prof­its are li­able for tax. The ques­tion is what and how.

First a dis­claimer: I am not a tax ex­pert nor is this tax ad­vice. This is merely based on my per­sonal ex­pe­ri­ence. One should get solid per­sonal ad­vice from an ac­coun­tant or even SARS, which re­ally is the friendli­est and most help­ful Govern­ment depart­ment that we have.

The eas­i­est tax is Div­i­dend With­hold­ing Tax (DWT), which came into ef­fect two years ago. Here you pay 15% of the de­clared div­i­dend as tax. Be­ing a with­hold­ing tax, you don’t see the money, the 15% gets paid di­rectly to SARS on your be­half. So if a com­pany de­clares a 100c div­i­dend, you would re­ceive only 85c.

Next is tax for in­vestors. The dis­tinc- tion be­tween in­vest­ing and trad­ing used to be a lit­tle murky but has since been cleared up. Ear­lier this year SARS is­sued an up­dated doc­u­ment on how it will treat prof­its made from shares, with a sim­ple rule: hold for longer than three years and you pay Cap­i­tal Gains Tax (CGT), but if you sell within three years SARS may de­clare you a trader and then prof­its are taxed as in­come.

CGT is 33.3% of one’s mar­ginal tax rate and if you fall into the top 40% tax bracket, that means 13.3%. But the first R30 000 of cap­i­tal gain ev­ery year is tax free and, im­por­tantly, you only pay the tax when you sell. So while you may have a stock that has tripled in the last few years, your tax li­a­bil­ity is only due when you sell. Fur­ther, CGT came into ef­fect in 2001 and if you have a share you bought be­fore then, you pay the price it traded at on 1 Oc­to­ber 2001 (your bro­ker will have this value). This is in part why I hate sell­ing. Ev­ery sale I do from my long-term port­fo­lio im­me­di­ately loses 13.3%, so I pre­fer to buy qual­ity stocks and try to hold them for­ever.

The other side of the tax coin is tax on traders, which is loosely def ined as trans­act­ing for in­come rather than growth. Here you pay tax at your mar­ginal rate, so po­ten­tially 40% if you are in the top tax bracket. How­ever, as it is deemed in­come, you are able to off­set all the costs in­curred in achiev­ing that in­come. This would in­clude bro­ker­age costs, los­ing trades and other costs such as books, soft­ware and maybe even sub­scrip­tions to trad­ing ad­vice ser­vices and pub­li­ca­tions such as this one and po­ten­tially even pro-rata on your In­ter­net ac­cess costs and the like. The key point here is to keep ex­cel­lent records of your costs.

I al­ways sug­gest to keep sep­a­rate ac­counts for your trad­ing and in­vest­ing as this will keep things clean for tax pur­poses and your bro­ker should be able to of­fer this at no ex­tra cost to you. Then, when fill­ing in your tax re­turn, you have nice clean distinc­tion be­tween trad­ing and in­vest­ing. Also, some­times you buy a stock for the long term, but you sell sooner than ex­pected due to some­thing chang­ing for the worse. If it is in your in­vest­ment ac­count it is eas­ier to de­fend as an in­vest­ment.

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