When shares are sold the question always gets asked: How much of the purchase price needs to go to SARS? This will depend on whether the sale is subject to capital gains tax (also known as taxed on capital account) or normal income tax (also known as taxed on income account).
If the purchase price for the sale of the shares is taxed on income account, the maximum effective tax rate would be 45%. If, however, it could be argued that the sale is subject to capital gains tax (and taxed on capital account) the maximum effective tax rate would only be 18%.
Therefore, it is more advantageous for taxpayers to have assets classified as capital assets and the subsequent sale to be taxed on capital account.
A safe harbour rule exists: Where the taxpayer continuously held shares for more than three years, any subsequent sale will be taxed on capital account (i.e. at 18%). The three year rule, however, does not imply the opposite. In other words, shares held for less than three years are not automatically taxed on income account.
For shares held less than three years, the particular facts of each scenario need to be considered and are of utmost importance. The taxpayer can argue—and needs to be able to prove—that the sale should be taxed on capital account. Unfortunately, this can only be proven by relying on case law as no definitive guidelines exist.
The intention of the taxpayer is the most important factor. However, taxpayers can have more than one intention or change their intention.
Below are a couple of examples of intention:
- The scale and frequency of transactions: More frequent transactions increase the likelihood of tax on income account.
- Reasons for selling: A forced sale because you need to re-balance your portfolio or need the money for an emergency, will potentially be taxed on capital account. Selling to make a profit will potentially be taxed on income account.
- For-keeps test: This indicates the nature of the capital. Can you indicate that when you bought the shares, you bought them with a view of holding them as growth assets and not just short-term trading assets?
Many factors exist (too many to adequately deal with in this blog), but we want to leave you with this thought: Yes, dear taxpayer, it’s entirely possible for you to hold your shares for less than three years, and for the sale to be taxed on capital account.
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