The JSE and finance forum for South Africa
General Category => Shares => Topic started by: Fawkes85 on December 03, 2015, 07:34:22 am
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As I understand it if you hold a share for less than three years it gets taxed as Income Tax and more then three years as CGT. I thought this was for ALL shares including shares held in ETFs. But according to a report on Moneyweb this is not the case. More specifically:
"As the shares and other securities are held in the collect investment scheme, SARS will not treat a sale as trading income. This is different to direct share investments, where proceeds may be treated as income if a share is held for less than three years.
With collective investment schemes only capital gains tax (CGT) will be applied on the sale of units. This is even though they may have been bought monthly and held for less than three years...That means that the only tax you will pay at the point of selling your securities is CGT. This is calculated based on the current ETF price less the ‘base cost’."
So you can hold ETFs for less than 3 years and still only pay CGT?
For more you can read it here:
http://www.moneyweb.co.za/mymoney/moneyweb-personal-finance/how-is-tax-calculated-when-you-sell-an-etf/
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I'm confused, as at the end he says "This final, taxable amount, is what is added to your taxable income and taxed at your current rate.".
I thought CGT is 15%, so why is he mentioning current tax rate??
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CGT = 33,3% (not 33.33%)
The final tax due after calculating CGT which was R3 333 must be added to your taxable income. The actual tax you pay depends on your marginal tax rate.
Eg. if your marginal tax rate is 41% (currently the max.) then your effective tax on the R 3 333 is 13,65% (33,3 x 41%). If your marginal tax rate is lower,
say 31% then your effective tax on the R 3 333 is 10,32% etc.
Easy peasy.
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I'm confused, as at the end he says "This final, taxable amount, is what is added to your taxable income and taxed at your current rate.".
I thought CGT is 15%, so why is he mentioning current tax rate??
Are you confusing capital gains with dividends tax? Dividends are taxed at 15%
The first R30 000 capital gain is completely tax free. After that, one third of the amount is considered to be income. So if you make a capital gain of R300k, you subtract R30k to get R270k, then divide by three to get R90k. That R90k is added to your annual income, and taxed according to the tax tables for your total income. If you had no other income (dividends don't count), then you'll only pay tax as if you earned R90k that year, which works out to R2943 in annual taxes. That means that by living on R300k capital gains per year, you get to keep R297k. Not a bad deal.
Now on to the original topic, it's the first I've heard. If true I'll be happy and sad. Sad because this year I planned to use a trading loss on an ETF to cancel out three times as much capital gains on a unit trust. But going forward, it'll be favourable for me. Has anyone recent sold an ETF for a profit that was held for less than 3 years? How did your tax look for the year?
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This does not sound correct and will need further research. As far as I know, the fund manager of a collective scheme buys and sells shares all the time but you will be exempt from any tax.
Should you sell your UT or ETF within 3 years, you would be taxed as Income.
I think the author is confusing the above.
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Note: If you have a Capital Loss, you must ADD the R30K to the loss. ie. Capital Loss = (100 000.00) ADD 30 000.00 = (70 000.00) This cannot be offset against normal income but only future capital gains.
@Patrick. It will be a good idea to sell half before end Feb and another half soon after as you will then have a R60k total exclusion.
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You know, I have never invested in either unit trusts nor ETFs but it appears that both those are subject to CISS 'rules' and Section 9(c) is not relevant here, so there is no 3 year rule stuff for the individual investor. (CGT is paid within the funds and the investor is only subject to CGT on disposal even if they dispose within 3 years).
Don't know if I am correct, hence 'appears' in bold.
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I have just spent over 2 hours researching this but come up with nothing.
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This is quite interesting news.
Will make tax submissions a bit easier - was always afraid that me testing the waters on a few ETF's before settling on my current portfolio will have an impact on taxes paid.
constant CGT on ETF's will be awesome!
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Wait... let me just see if I understand this. With what I'm sure is rather naive simplification, it sounds as if one can draw about R253 000 pa without paying any tax, assuming you have no other taxable income.
R253 000 pa, less R30 000, gives you R223 000. Multiply that by 33%, you get R73 590, which is slightly less than the tax threshold of R73 650. Have I made some colossal error in understanding, or is this accurate?
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Nope, you're right, you will still pay dividend tax and VAT of course.
Mr Dividend has another method which I wrote about here: http://investorchallenge.co.za/lets-all-be-guilty-of-tax-avoidance/
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Did you perhaps mean this one? http://investorchallenge.co.za/can-you-retire-by-40/ That one appears to have more to do with not paying taxes while still extracting a decent amount to live on.
Regardless, pretty rad! I would imagine that this is definitely the way to go, as opposed to going purely for dividends, as (I think) any proceeds are taxed at 15% regardless. I suppose the downside is, when it comes time to sell your shares, you might wind up not getting too much if the market's taken a downswing.
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Yes, that was it! It is pretty cool though, if you can live on smaller amounts it's far more tax efficient being an investor than a salaried worker.
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Yeah, it most certainly is - I guess it's the reward for saving hard and not blowing it all.
(It does make the case for retirement annuities even more tenuous - even the lowest amount you can get, 2.5% pa of the two thirds, is likely to be in income tax territory, even accounting for inflation. Get the tax benefit now, invest it, but get nailed at 55, perhaps far in excess of what you'd pay if you just invested all your after-tax income, even with taking the hit now? Man, suppose you need to a bit of everything, but still, can't help but feel that there must be a better option.)
Regardless, if ETF sales are going to be regarded as CGT events, then YES, awesome!
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Reading SARS website, I came across this:
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Dividends payable to the following beneficial owners could be exempt from Dividends Tax (provided the required “declaration”
and “undertaking” are submitted to the company or withholding agent in time):
1.Portfolios of collective investment schemes in securities.
2.Any person to the extent that the dividend constitutes income of that person.
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Wait... let me just see if I understand this. With what I'm sure is rather naive simplification, it sounds as if one can draw about R253 000 pa without paying any tax, assuming you have no other taxable income.
R253 000 pa, less R30 000, gives you R223 000. Multiply that by 33%, you get R73 590, which is slightly less than the tax threshold of R73 650. Have I made some colossal error in understanding, or is this accurate?
Must say, when I decided to go on the dividend route, I did not quite understand CGT. Since finding out about it I have a smaller account that I now do use for higher growth stocks. As you have pointed out, you can do very well on ETF's and CGT - and as a coupe even better.
BTW - I have now heard from two people (that should know) that you can use the R23K interest allowance on REIT income one said it's actually in one of his returns. And, of course, there still could be a healthy untaxed/no cgt dividend stream from your TFSA's
Still happy with the dividend method (for me) - knowing I will never sell the bulk of my shares is kinda nice for me. I just have to watch/track the dividend stream.
2.Any person to the extent that the dividend constitutes income of that person.
I think it would be harder to prove it DID NOT constitute income!
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BTW - I have now heard from two people (that should know) that you can use the R23K interest allowance on REIT income one said it's actually in one of his returns. And, of course, there still could be a healthy untaxed/no cgt dividend stream from your TFSA's
Nope, REITS (local ones) are taxed under code 4238 (code not shown after building return - oversight by SARS).
and..
In the past the income derived from PLSs and PUTs was therefore taxable as interest. But REITs declare dividends and these dividends, unlike dividends declared from non-REIT shares, are taxable at your client’s personal marginal tax rate. The income being declared as a dividend is therefore not tax friendlier than when it was declared as interest. To the contrary, as the annual interest exemption may not be applied to REIT income.
I assume the person(s) you are referring to must have had other taxable income in excess of the R23800.- exemption, making it appear that the REITS also qualified.
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Can't find the thread but as I never got clarity on selling ETF's before the 3 year holding term. From Moneyweb.
With collective investment schemes only capital gains tax (CGT) will be applied on the sale of units. This is even though they may have been bought monthly and held for less than three years. :TU:
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I find it interesting in that you can open a TFSA account and you can trade within that account like a trader without the profits being treated as income. I am sure that once treasury tumble onto this that they will impose restrictions, but in the interim it may be a good ploy to invest R 30,000 before Feb 29th and then a further R 30,000 in early March and then trade in one or more of the 39 permissible counters - to my mind ETF and DBX type counters lend themselves to trading with impunity from a tax perspective. I will be following this practice when I open a TFSA account shortly
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I have contacted Hugo van Zyl and he will explain it here personally. He is a Chartered Accountant and a Master Tax Practitioner plus he lectures at universities, seminars and even lectures SARS staff on tax matters. The mere mention of his name at a SARS office will give you a "get out of jail" card. He is also down to earth and approachable.
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TFSA intends to allow you to trade tax free! In the explanatory memorandum they did deal with this
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Section 9C or the 3 year rule does not apply to an EFT as an EFT fails the qualifying share and the equity share definition. Where the EFT is registered as a collective investment scheme (CIS) (but not a fund of collective investment schemes) then 9C will apply. I am not aware of any EFT registered as CIS but I stand to be corrected. Most EFT's tracks an index and not directly a collection of shares therefore most fail the CIS test.
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Orca thank you for the compliment! Ut lately SARS makes us all sweat! They have this draconian TAA on their side
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EFT should read ETF mr spell checker!!
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Very interesting. So the ETF investors do not have physical ownership of the underlying companies and they only track their performance. This makes them taxed differently to a CIS or UT.
SATRIX can be bought as a CIS in the form of a UT and you have voting rights. Or it can be bought as an ETF and you have no voting rights.
Thanks Hugo. :TU:
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So now all those people who want to try their hands as traders can do so under the guise of investing through the TFS account - c0me end March I will try and ramp up my R 60,000 quite significantly and only ending up paying brokerage
Sweet
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ETF shares are simply traded back and forth, through an exchange, between individual shareholders.
Therefore, there is no need to liquidate any of the ETF's holdings to pay sellers of ETF fund shares.
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ETF shares are simply traded back and forth, through an exchange, between individual shareholders.
Therefore, there is no need to liquidate any of the ETF's holdings to pay sellers of ETF fund shares.
Not sure what your point is Orca - but with no restriction on buying or selling you can effectively trade in ETF, whereas you may not trade individual share counters. So the reality is that by trading/ churning ETF you are not deemed to be a trader in terms of the legislation, whereas you would if shares are traded under current circumstances and profits/losses are deemed income/expenditure
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Best everyone checks with properly qualified tax people - i.e not random forum posters. My understanding is that tax rules are circumstantial and not product specific. The intention if the tax payer is paramount in determining the nature of the profit. Not the nature of the product itself. With all respect Marco - you seem all wise on all topics. Be careful with your advice/opinions across the board.
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Recap on some points concerning TFSA's ...
From Moneyweb
In order to contextualise the answer it is important to understand that both
ETFs and unit trusts are portfolios established under registered collective
investment schemes regulated by the Financial Services Board. That means that
they are pooled vehicles whereby the assets held in the portfolio are acquired
using investors’ funds and are collectively managed by the asset manager.
As the shares and other securities are held in the collect investment scheme,
SARS will not treat a sale as trading income. This is different to direct share
investments, where proceeds may be treated as income if a share is held for less
than three years.
With collective investment schemes only capital gains tax (CGT) will be applied
on the sale of units. This is even though they may have been bought monthly and
held for less than three years.
On top of this, it is also important to note that all the income received by way
of distributions is taxed in the hands of the investor in the tax year in which
it is received. Income distributions comprise mainly actual dividends declared
by the underlying constituents held in the portfolio.
The dividends received by the portfolio are subject to dividends withholding tax
at a South African rate of 15% for taxpayers that are not exempt in terms of the
Income Tax Act. The dividends withholding tax will be deducted by the final
regulated intermediary and paid over to SARS.
Therefore all distributions will be received by the investor net of dividends
withholding tax. Distributions also include interest and scrip lending income
(if applicable), which will be taxed as normal income in the hands of the
investor.
That means that the only tax you will pay at the point of selling your securities is CGT.
This is calculated based on the current ETF price less the ‘base cost’.
From Treasury (older document)
Exchange traded funds
Exchange traded funds (ETFs) that are registered as collective
investment schemes (CIS) will be allowed in the accounts 8,
providing exposure to a diversified pool of securities at a relatively
low cost. Exchange traded notes and ETFs that are not registered as
CISs have lower regulatory requirements and some of these non-CIS
products, such as the Gold ETFs, are not sufficiently diversified.
Although products such as the Gold ETFs may act as a good hedge
when used as part of a broader portfolio, they may be inappropriate
as a single investment. ETF’s and exchange traded notes that are not
registered as CISs are not recommended for inclusion.
And for those who think they can willy nilly 'trade' their ETF's
However, once money is withdrawn from the account, any additional deposits will
be subject to the annual capital contribution limit of R30 000 (and the lifetime
capital contribution limit of R500 000), she says. Any contributions made, even
if subsequently withdrawn from the savings account, will therefore forever be
counted under the R500 000 lifetime limit.
For example: If Investor A deposits R30 000 into a tax-free savings account on
March 1 2015, and another R30 000 on March 1 2016, and withdraws R15 000 on
October 1 2016, the investor won’t be able to put the R15 000 back until March 1
2017 because they have already reached the R30 000 capital contribution limit
for that tax year (March 1 2016 to February 28 2017).
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Best everyone checks with properly qualified tax people - i.e not random forum posters. My understanding is that tax rules are circumstantial and not product specific. The intention if the tax payer is paramount in determining the nature of the profit. Not the nature of the product itself. With all respect Marco - you seem all wise on all topics. Be careful with your advice/opinions across the board.
Before you insult people. Hugo is highly qualified and a 2 minute Google search shows;
Education
B.Acc, Accounting. Auditing 1984
University of Pretoria
Pretoria , Gauteng, South Africa
MST, Indirect Taxes 1993
University of Pretoria
Pretoria, Gauteng, South Africa
M.Com (Tax) is the South African Equivalent
Lectured cross border tax in the UK and USA for Expat South Africans
Guest lecturer TUKS or CPE Pretoria for Advance Trust Law Post Graduate Certification - students all lawyers and accountants
Professional Certifications
CA(SA)Active 1986
Master Tax Practitioner Active 2010
PR-8C200C1 SARS Tax PractitionerActive 2009
TEP (STEP.ORG)Active 2013
Associations and Societies
SAICA www.saica.co.za (Served on Tax Advisory Committee )
The SAIT - SA Institute of tax practitioners (Master Tax Practitioner Member 10863551 )
http://crossbordertax.blogspot.pt/2012/09/hugo-van-zyl-die-wegkaner-se-beste.html
https://www.taxconnections.com/profile/Hugo-Van-Zyl/12258993
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According to Old Mutuals site dealing with Tax Free Savings account they make the statement
"Pay no tax on your investment.
$ You pay no tax on your investment growth or when you take your money out
$ You pay no tax on dividends, capital gains or interest"
So those saying you will have to address CGT and dividends tax need to be mindful of what OMSA are saying because both can't be right
So lets stop the slagging off of forumites and their informants and lets rather deal with facts as they stand at present - why even Pravin could tweek the rules of the TFSA this afternoon
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@gcr. I cannot open a TFSA as I am not resident so I am not interested in that. Also the amounts some people invest are far too huge for TFSA's.
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Grindrod kindly sent me a pdf doc of all ETF's and UT's registered as CIS' with the FSB. Unfortunately, the one's we have such as DBX, DIVTRX and STX ETF's are all registered as CIS.
https://www.fsb.co.za/Departments/cis/Pages/approvedSchemes.aspx
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We never actually resolved this. This link http://www.moneyweb.co.za/mymoney/moneyweb-personal-finance/how-is-tax-calculated-when-you-sell-an-etf/ still says CGT only, but nobody managed to confirm it, and my research also hasn't unearthed anything yet. Has anyone tested the waters on this?
Edit: Just found the other thread Orca opened where a very well qualified tax expert has also confirmed, ETFs are only taxed as capital gains. This is good news to me as I only own ETFs... Two threads merged.
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You know, I have never invested in either unit trusts nor ETFs but it appears that both those are subject to CISS 'rules' and Section 9(c) is not relevant here, so there is no 3 year rule stuff for the individual investor. (CGT is paid within the funds and the investor is only subject to CGT on disposal even if they dispose within 3 years).
Don't know if I am correct, hence 'appears' in bold.
That's what I thought. CISS rules are CISS rules.