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Author Topic: Can you be both a trader and an investor (tax wise)  (Read 23579 times)

JhbMaverick

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Can you be both a trader and an investor (tax wise)
« on: April 10, 2013, 03:52:59 pm »
If I were to have 90% of my portfolio in a passive investment, ie. unit trusts or ETFs, and trade with the remaining 10%, what will happen come tax season?

Obviously I'll trade before the 3 year rule for investing, but would any capital gains on my passive portfolio be added to income as would happen with trading gains?
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Krypt0n1te

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Re: Can you be both a trader and an investor (tax wise)
« Reply #1 on: April 10, 2013, 10:50:39 pm »
I'm pretty sure you will have more than a valid point to prove to SARS that you're an investor and should be taxed at CGT rates if they accidentally tax your profits at marginal tax rates after holding the shares more than 3 years.

Just don't toss away that 10% and then start nibbling away at that 90% investment.
Sure it's fun to trade, but I think there is very very very little traders outperforming investors if you take ALL costs, taxes and time in consideration.

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gcr

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Re: Can you be both a trader and an investor (tax wise)
« Reply #2 on: May 29, 2013, 02:12:07 pm »
This is a general question to which I welcome some insights
My portfolio as it stands currently is treated as an investor portfolio upon which I pay CGT on profits at time of sale.
I recently attended a seminar on SSF's (have been on such seminars on CFD but am not interested in these instruments) and am contemplating looking at SSF's as a trading/investment option. I have raised the question of tax with the presenter specifically in that I wanted SARS to treat my 2 portfolios separately. Thus all activity over SSF's would be treated as income and I would be taxed accordingly, but I don't want this income to be aggregated with my pension and thus push me up into a new tax bracket and thus pay more tax. He suggested that to not get the income from SSF's aggregated with my pension that I may have to open up a company account and thus income would be subject to company tax rules. If I read reports on opening company accounts and the red tape and nonsense that goes with it, it seems a daunting task.
So my question is - is there anyone on the forum who has managed to get SARS to partition their share activity into investment and trading but with minimal tax implications.
Should nobody have managed to achieve this, then my next port of call would be to write to them with a scenario, and ask them for input on how this can best be done, and what their suggestions would be - would also be willing to have meetings with SARS in need to get a clear understanding of what the rules would be. My biggest concern being that you go down a path only to find that it doesn't work like that and you can never get back to the original situation
Please feel free to comment - on the basis that I don't have the answers       
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Orca

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Re: Can you be both a trader and an investor (tax wise)
« Reply #3 on: May 29, 2013, 06:05:15 pm »
Very simple. You buy 2 houses. One you live in and the other is a fix me up. You fix. You sell for profit. Buy another fix me up and do the same. Sell for profit. This 2'nd house becomes a business as you derive income yearly from it.
Tax year end comes and you must add ALL profit made from the trading house to your income. The primary home has increased in value but you have not sold it yet so no tax.
After +- 3 years you sell your primary home at a profit. Now you pay CGT on the profit at 33.3% after deducting R30k exclusion. This amount you add to your income.

Works the same with investing and trading. KEEP YOUR 2 ACCOUNTS SEPARATE. Makes it easier.

I must add that with primary residence, the first R2M is not taxable. Not so with investments.
Am I correct? 
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jaDEB

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Re: Can you be both a trader and an investor (tax wise)
« Reply #4 on: May 29, 2013, 06:39:00 pm »
I have read and heard about tax on shares, and I must say Orca, your explanation is the best and easiest to understand.

Thanks.

 8)

I believe you must also be honest with the taxman, that is very important.

PS.

a good liar has to have a good memory, and mine sucks.  ??? - lol I dig this okes nervous twitch, it's just like mine looool
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jaDEB

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gcr

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Re: Can you be both a trader and an investor (tax wise)
« Reply #5 on: May 30, 2013, 09:43:17 am »
Quote from: Orca on May 29, 2013, 06:05:15 pm
Very simple. You buy 2 houses. One you live in and the other is a fix me up. You fix. You sell for profit. Buy another fix me up and do the same. Sell for profit. This 2'nd house becomes a business as you derive income yearly from it.
Tax year end comes and you must add ALL profit made from the trading house to your income. The primary home has increased in value but you have not sold it yet so no tax.
After +- 3 years you sell your primary home at a profit. Now you pay CGT on the profit at 33.3% after deducting R30k exclusion. This amount you add to your income.

Works the same with investing and trading. KEEP YOUR 2 ACCOUNTS SEPARATE. Makes it easier.

I must add that with primary residence, the first R2M is not taxable. Not so with investments.
Am I correct?

Orca - though I follow your example with two houses the issue is not as simple as you make it. For example any expenditure and income/capital would have to be accrued to whom the house is registered to - which would appear to be the purchaser of the first house. Lets not deal with the ramifications of registration and deeds office implications but purely on being assessed as an entity by SARS. My point is SARS will see you as an entity owning both houses, what becomes more apparent is that if you want to be treated differently you would need to have a separate company for the 2nd house, and thus it probably by extension also applies to share investing/trading
The current exclusion on the primary property is R 2 million

I will reiterate my question is their anyone amongst the forumites who has/have had dealings with SARS on treating them as a separate entity for investing and trading but keeping the tax treatments separate as well   
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carfan

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Re: Can you be both a trader and an investor (tax wise)
« Reply #6 on: May 30, 2013, 10:28:03 am »
From my experience Orca is spot on the money. SARS will not see you as one all encompassing entity in his example - as an individual you are well within your rights to own a property on capital account (primary residence) and a second property on revenue account (rental property). These are treated differently for the purposes of your tax submission.

The same goes for your investment portfolio versus your trading account (recommended that you keep them separate). Your intention in your investment portfolio is clearly capital in nature, as will most likely be evident in your treatment thereof (ie you won't necessarily be buying and selling, in other words trading, with this account). While your intention in your trading account will be one of generating revenue. It all comes down to intention.
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gcr

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Re: Can you be both a trader and an investor (tax wise)
« Reply #7 on: May 30, 2013, 12:51:33 pm »
Quote from: carfan on May 30, 2013, 10:28:03 am
From my experience Orca is spot on the money. SARS will not see you as one all encompassing entity in his example - as an individual you are well within your rights to own a property on capital account (primary residence) and a second property on revenue account (rental property). These are treated differently for the purposes of your tax submission.

The same goes for your investment portfolio versus your trading account (recommended that you keep them separate). Your intention in your investment portfolio is clearly capital in nature, as will most likely be evident in your treatment thereof (ie you won't necessarily be buying and selling, in other words trading, with this account). While your intention in your trading account will be one of generating revenue. It all comes down to intention.
Believe me I follow your logic, but here's the rub.
You are a normal working person who receives a fixed monthly salary (income), you have an investment account with a broker and you buy and sell shares within the parameters of SARS dictates. Now you open up an SSF account with the same or another broker and you trade over this account, and lets say you make a profit of R100,000 in the year (arbitrary figure). When you get to the portion stipulating your income for the tax year you will have to declare - your salary, any other benefits and any other income. Now the R100,000 profit becomes income, and could be taxed at your marginal tax rate (maybe as high as 40%) or the tax man may tax you at a rate commensurate with your net tax position - which could be a lower overall figure than the 40%. If you know before hand which way the tax man is going to access you then at least you can decide whether to claim deductions for the trading leg of your portfolio - so that is what I am trying to determine before writing or discussing with SARS. What I don't want is a witch hunt after entering into discussions or correspondence
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carfan

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Re: Can you be both a trader and an investor (tax wise)
« Reply #8 on: May 30, 2013, 02:20:50 pm »
Ah I see what you're asking.

You will be taxed on the trading profit (R100 000) along with all your other income (salary in this eg) at your marginal rate. I say that because you will, or should in any case, declare the trading profit as such - and not as a "Disposal of Shares" in the capital section of your income tax return.

So I'd not hesitate is deducting all related expenses, losses etc incurred through your trading account.
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MarketMaker

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Re: Can you be both a trader and an investor (tax wise)
« Reply #9 on: June 11, 2013, 03:56:46 pm »
Not a tax accountant, but:

You certainly can be both in the eyes of SARS, so long as you keep the activities separate, including trading and investing in the same shares as SARS can view the investment in the same shares as an extension of your trading strategy if they get really pedantic. Even more so for derivative products where you have exposure to the same underlying asset in both portfolios, for example a long position in your investment account appears to be a hedge against your trading activities. You'd have to be audited for this to really come to light though.

Just be sure to use mark-to-market accounting for your trading account to fully realise the tax benefits.

Remember that your investments are taxed separately upon DISPOSAL so are declared separately. While this is all good and well, it doesn't necessarily mean that CGT is beneficial over your marginal tax rate on trading. Traders can offset large portions of their tax liabilities through various mechanisms while investors simply can't. Just be careful with regards to claiming expenses in the scenario posted above - your one SSF account might not qualify you in the eyes of SARS to deduct all sorts of expenditure. Only the expenditure related to the income can be claimed and they're pretty strict on this rule with traders, in that this will be rather evident to anyone looking over your tax forms. You can certainly offset your losses though. Common occurrence with SSFs...:D
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