By Estian Haupt, Director, AJM
Understanding the Tax Implications of Share Transactions
Buying and selling shares has become routine for many South African investors and traders. While executing these trades may feel simple, the tax implications can prove to be far more complex. Understanding the tax implications of these transactions is essential, whether you hold listed shares, selling shares in your own company, or structure investments through a corporate vehicle.
Below, I outline key tax consequences that may arise, depending on your specific circumstances, to assist you in making an informed decision.
Capital vs Revenue: How SARS decides Which Tax Applies
For many taxpayers, the tax consequences of share trades seem straightforward. You receive a statement from your broker indicating the cost price, acquisitions, and sales for the year, as well as the resultant capital gain or loss. But is it that simple? Not necessarily.
SARS distinguishes between capital gains and revenue profits, and the tax outcome depends on your intention when acquiring and disposing of the shares.
– Capital gains are taxed at a lower effective rate.
– Revenue gains are taxed at normal income tax rates.
For shares held for more than three years, the answer is generally that the shares will be held as capital assets. Because of a specific provision in the Income Tax Act, any amount received or accrued (or expenditure incurred) in respect of an equity share is deemed to be capital in nature if the share in question has been held for more than three years.
What about shares held for less than three years? As the deeming provision of the Income Tax Act does not apply, the “normal” tests to determine whether a receipt or accrual is of a capital or revenue nature must be applied. Although no single factor is conclusive, the following acts as a useful guideline:
- Intention: The most important factor is the intention when the shares were bought and sold. Shares purchased as a long-term investment will likely be of a capital nature. Shares bought for resale at a profit will likely be revenue in nature. If shares were acquired with a mixed intention, the dominant intention will prevail. The tests below serve as a basis for confirming a taxpayer’s intention.
- Scheme of profit-making: Generally, assets acquired for resale in a scheme of profit-making will be revenue in nature.
- Fortuitous gains: Profits which are fortuitous (i.e., an opportunity came along that was too good to pass on) will more likely be of a capital nature. In contrast, profits that are deliberately sought and worked for are more likely to be revenue in nature.
- The “for keeps” test: Generally, investments acquired for the long-term, for better or worse, for “keeps” will more likely be of a capital nature.
- Scale and frequency of transactions: The more frequent share acquisitions and disposals occur, the more likely it is that the shares will be seen as of a capital nature. This is not to say that all shares purchased by a share dealer will always be of a revenue nature, but the frequency of transactions is significant.
When considering the above tests cumulatively, a determination can be made of a taxpayer’s intention and whether receipts or accruals will be taxed as capital gains or income. However, this is not where the matter ends; other tax consequences must also be considered.
The disposal of immovable property by non-residents
In some instances, non-residents may not be subject to normal tax on share disposals. However, a non-resident may be subject to capital gains tax on the disposal of shares if:
- The company is property-rich: 80% or more of the market value of the equity shares at the time of their disposal is attributable directly or indirectly to immovable property in South Africa
- The non-resident holds at least 20% of the equity shares in the company, whether alone or together with any connected person, directly or indirectly.
In other words, the sale of shares held as capital assets by a non-resident seller could be subject to South African capital gains tax if those shares are in a “property-rich” company.
Although it does not create a separate tax, a withholding tax on the sale of immovable property by non-residents could also apply in relation to receipts or accruals of property-rich shares. The withholding obligation is on the person making the payment to the non-resident person. The amount to be withheld depends on the nature of the seller (as a natural person, company, or trust) and is based on the amount payable, with no regard to the base cost. The seller can, however, apply to the Commissioner of SARS for a directive that no amount or a reduced amount may be withheld. This withholding will be applied against the tax liability for that person for the relevant year of assessment.
When Transfer Duty Applies to Share Transfers
While Transfer Duty applies to the transfer of residential property and not to shares, it may also apply when shares in a “residential property company” are transferred. A company is deemed a “residential property company” if:
- More than 50% of its asset value consists of residential property, and
- The property falls within the definition of “residential property” in the Transfer Duty Act (e.g. dwelling house, holiday home, apartment, residential land).
In other words, the transfer of shares could result in a Transfer Duty obligation, depending on the nature of the underlying assets.
Securities Transfer Tax: What Investors Should Know
Unless an exemption applies, Securities Transfer Tax is payable on every transfer of any security in:
- South African companies, and
- Foreign companies listed on a South African exchange (e.g. JSE)
A “security” includes shares, and the rate at which Securities Transfer Tax is levied is set at 0.25% of consideration or market value.
In the context of an unlisted share, the securities transfer tax is payable by the company whose shares are transferred, but is recoverable from the purchaser. In the case of listed shares, the purchaser is liable for the tax.
Although this rate may seem modest, it could result in significant liability depending on the value of the transaction being considered. The transfer of shares also entails the obligation to file a Securities Transfer Tax return and pay the relevant amount. Late payment could also result in interest and penalties.
Final Thoughts: Why Share Transactions Aren’t Always Simple
While the purchase and sale of shares may appear straightforward, the tax implications can be nuanced and far-reaching. Whether a transaction gives rise to normal tax or capital gains tax depends largely on the taxpayer’s intention and the surrounding circumstances. Additional considerations such as Securities Transfer Tax, Transfer Duty on residential property companies, and capital gains tax implications for non-residents further illustrate that not all share transactions are treated equally.
Investors, company shareholders, and traders should carefully assess the nature and structure of their transactions before implementation. Professional tax advice can help ensure compliance, minimise risk, and optimise after-tax returns.