Shares and unit trusts

In recent years an increasing number of South Africans have become share owners. The proliferation of broad-based employee share incentive arrangements has also contributed to share ownership among South Africans.

So what do shareholders need to be aware of in computing their liability for income tax and CGT?

Income tax or CGT?

1. Individuals

Shares held as trading stock are ones that you bought for the main purpose of reselling at a profit. Any gain or loss you make on disposal of a share you held as trading stock will be of a revenue nature. Revenue gains are subject to income tax at your marginal tax rate, which may vary between 18% (but effectively 0% if your tax rebates are taken into account) and 40%, depending on the level of your taxable income.

By contrast, if you hold a share as a capital asset (that is, as a long-term dividend-producing investment) any gain or loss upon its disposal will be of a capital nature.

Capital gains are subject to tax at a lower rate than income gains.

Annual exclusion

For the 2014 year of assessment an individual must disregard the first R30 000 of the sum of capital gains and losses in the year of assessment for CGT purposes (2013: R30 000). This is known as the “annual exclusion”. Of the balance remaining after applying the annual exclusion, and any assessed capital loss brought forward from the previous year of assessment, 33,3% is included in your taxable income and taxed at your marginal tax rate in the same way as, for example, your salary or pension income. The effective rate of tax on an individual’s capital gain in a year of assessment can thus vary between 0% and 13,32%. The 0% rate would apply when –

the sum of capital gains and losses does not exceed the annual exclusion;
the sum of capital gains is less than or equal to the sum of capital losses; or
your taxable income falls below the level at which tax becomes payable.

The 10% rate would apply when your marginal tax rate is 40%3 (that is, 40% (marginal rate) x 33,6% (inclusion rate) = 13,32%).

2. Companies and Trusts

Companies and trusts pay CGT at a higher rate than individuals. They do not qualify for the annual exclusion, and must include 66,6% of any net capital gains in taxable income.

The effective tax rate on a capital gain for a company is 28% x 66,6% = 18,6465%.

A trust which is not a special trust has an effective CGT rate of 40% x 66,6% = 26,64%

A special trust is subject to the same tax rate (on a sliding scale) and inclusion rate (33,3%) as an individual.

A special trust created solely for persons having a disability which incapacitates them from earning sufficient income for their maintenance, or from managing their own financial affairs qualifies for the annual exclusion. But a special trust created on death for relatives which include a beneficiary under the age of 18 does not qualify for the annual exclusion although it does qualify for the 33,3% inclusion rate .