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Author Topic: Wait. ETF sales are ALWAYS taxed as CGT?  (Read 29063 times)

Fawkes85

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Wait. ETF sales are ALWAYS taxed as CGT?
« on: December 03, 2015, 07:34:22 am »
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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devan

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Re: Wait. ETF sales are ALWAYS taxed as CGT?
« Reply #1 on: December 03, 2015, 09:58:00 am »
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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Moonraker

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Re: Wait. ETF sales are ALWAYS taxed as CGT?
« Reply #2 on: December 03, 2015, 10:12:36 am »
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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Patrick

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Re: Wait. ETF sales are ALWAYS taxed as CGT?
« Reply #3 on: December 03, 2015, 10:17:52 am »
Quote from: devan on December 03, 2015, 09:58:00 am
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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Orca

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Re: Wait. ETF sales are ALWAYS taxed as CGT?
« Reply #4 on: December 03, 2015, 01:54:57 pm »
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.

______________________________________________________________________________________
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.
______________________________________________________________________________________



« Last Edit: December 03, 2015, 01:58:02 pm by Orca »
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Moonraker

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Re: Wait. ETF sales are ALWAYS taxed as CGT?
« Reply #5 on: December 03, 2015, 03:02:13 pm »
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.
« Last Edit: December 03, 2015, 05:08:45 pm by Moonraker »
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Orca

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Re: Wait. ETF sales are ALWAYS taxed as CGT?
« Reply #6 on: December 03, 2015, 03:22:47 pm »
I have just spent over 2 hours researching this but come up with nothing.
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erwintwr

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Re: Wait. ETF sales are ALWAYS taxed as CGT?
« Reply #7 on: December 03, 2015, 04:40:39 pm »
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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Strive

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Re: Wait. ETF sales are ALWAYS taxed as CGT?
« Reply #8 on: December 18, 2015, 11:35:43 am »
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?
« Last Edit: December 18, 2015, 11:38:16 am by Strive »
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Patrick

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Re: Wait. ETF sales are ALWAYS taxed as CGT?
« Reply #9 on: December 18, 2015, 12:27:27 pm »
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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Strive

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Re: Wait. ETF sales are ALWAYS taxed as CGT?
« Reply #10 on: December 18, 2015, 12:46:01 pm »
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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Patrick

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Re: Wait. ETF sales are ALWAYS taxed as CGT?
« Reply #11 on: December 18, 2015, 01:00:39 pm »
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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Strive

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Re: Wait. ETF sales are ALWAYS taxed as CGT?
« Reply #12 on: December 18, 2015, 01:15:47 pm »
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!
« Last Edit: December 18, 2015, 01:24:09 pm by Strive »
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Orca

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Re: Wait. ETF sales are ALWAYS taxed as CGT?
« Reply #13 on: December 18, 2015, 04:29:21 pm »
Reading SARS website, I came across this:
-------------------------------------------------------------------------------------------------------------
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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Mr_Dividend

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Re: Wait. ETF sales are ALWAYS taxed as CGT?
« Reply #14 on: December 19, 2015, 09:34:40 am »
Quote from: Strive on December 18, 2015, 11:35:43 am
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.

Quote
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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