Before you jump at the opportunity of trading shares, you need to distinguish whether you are a trader or investor, because there tax implications for the two are vastly different:

If you are an investor, those shares are capital assets because you are buying the shares as a long-term investment and will therefore be subject to the capital gains tax (CGT) rules.

If you are trading in shares you have adopted a short-term strategy and those shares effectively form part of your trading stock, meaning you will be liable to the rules of income tax.

These two rules are significantly different and will affect the returns you make. The important factor is that individuals are only liable for tax on any profits that they have made. So if you buy a share for R10 and sell it down the line for R10, there is no profit and therefore no tax liability. The decision to invest (capital) or speculate (trading stock) must be made when the shares are acquired − they have to be one or the other.

If you cannot prove that the shares are capital assets or trading stock, the South African Revenue Service (Sars) has the right to make that decision for you. Therefore, it’s your responsibility (as the taxpayer) to prove the nature of the shares acquired. You must be cognisant that Sars has one fundamental principle: if you are making money on something, it’s taxable!

How long you hold onto shares is important

This is to determine whether the gain on shares sold is taxed as a capital or revenue profit.

More than three years (applied to an investor):

Any shares held for longer than three years are considered to be a long-term investment and profits from these shares attract capital gains tax when sold. But shares held by a share dealer are treated as a revenue asset, so profit from the sale of these shares attracts income tax.

Less than three years (applied to a trader):

The taxpayer’s intention of trade comes into question. If the shares were bought with the intention to trade and then sold again as such, any profit would be considered revenue and therefore fully taxed at the taxpayer’s marginal rate. But if the shares were acquired with the intention of trading, and then sold for another purpose, it would make them capital assets (a tricky one to prove), especially if the taxpayer has a history of trading.

How does it all work?

Remember there are two ways you can make a return on an investment: through capital growth or dividends. But in this column we will concentrate on explaining capital gains tax.

Capital gains tax

CGT is the tax you pay on any profit you make when you sell a share – it was introduced in South Africa with effect from 1 October 2001 and applies to the sale of an asset on or after that date. Before 1 October 2001, South African taxpayers enjoyed a position where all capital gains were tax-free.

Therefore:

After October 2001: 33.3% is an individual’s taxable capital gain for assessment for each year.

Before October 2001: 25% is applied for assessment before 2001.

All capital gains and capital losses made on the sale of assets are subject to CGT unless excluded by specific provisions.

So, if you sell an asset, you’ll be taxed on the difference between what it costs you to acquire the asset and the price you earned at the time of sale.

Amount invested — Price you sell = Profit (taxable amount).

You must be extremely vigilant when realising assets – don’t just assume that all your gains are capital in nature and therefore taxable at the lower tax rate

– The lower rate is a maximum of 10% for private investors.

– The far higher marginal rate, a maximum of 40% for most private investors, provides plenty of incentive for the Sars to want to tax gains as revenue.

Must a person register separately for CGT?

No, because CGT forms part of the income tax system.

However, you must simply declare your capital gains and capital losses in your annual income tax return. If the sum of your capital gains and capital losses exceeds the annual exclusion (2013: R30 000) and you are not registered for income tax purposes, it’s advisable to register as a taxpayer at your local Sars office to complete an income tax return for that year. The difference between capital gain and loss is simple:

• Capital gain on an asset disposed of is the amount by which the proceeds exceed the base cost of that asset. Base cost is the expenditure actually incurred in acquiring an asset (what you paid for it) including any other expenditure directly related to acquiring or disposing of that asset (for example, sales commission or fees).

• Capital loss is equal to the amount by which the base cost of the asset exceeds the proceeds.

What costs must you consider?

1. Annual exclusion − for each year of assessment an annual amount of the sum of your capital gains and losses is excluded for CGT purposes, which is R30 000 for natural persons from 2013.

2. Inclusion rate (the capital gains tax) for individuals is 33.33%.

An example of how to calculate your final return and taxable amount:

If an individual acquired shares for investment purposes six months after the implementation of CGT for R10 000 and sold of all of them during the 2014 year of assessment for R50 000. The exclusion is not applicable – the shares sold are not specifically exempt.

Capital gain

Proceeds 50 000

Less: Base cost (10 000)

Capital gain 40 000

Annual exclusion: The exclusion of R30 000 applies to a natural person.

Therefore:

Capital gain (as calculated above) 40 000

Less: Annual exclusion (30 000)

Net capital gain 10 000

Inclusion rate = 33.3%

Taxable capital gain = 33.3% x R10 000 = R3 330

Note that the implications of selling shares are the same, whatever your age. The capital gains annual exclusion of R30 000 per year remains unchanged whether you are retired or not. However, higher age rebates give relief to taxpayers over 65 and further relief to taxpayers over the age of 75.