You can exercise control over when you pay capital gains tax, but don't make silly mistakes because of that freedom.
The introduction of capital gains tax (CGT) into our taxation regime in October 2001 added a new dynamic to the investment decision- making process of the individual investor, people like you and me. Most citizens are not wildly excited about paying tax, although most understand that it is a necessary evil for the effective running of the state and the source of funding for the provision of ser-vices, social security and infrastructure.
We are confronted by a wide array of taxation, most of which is out of our control, such as income tax, value added tax, transfer duty, stamp duty, the fuel levy, the sin taxes on cigarettes and alcohol, and estate duty. The one form of taxation over which we have a degree of control is CGT, but this control is limited to the issue of timing - when we are going to pay it.
As with the introduction of any new taxation, CGT came to South Africa amid a chorus of protest. It was seen as a tax that discouraged saving in a country that historically has a shockingly low level of saving and a very low level of social security for the poor, unemployed and retired.
Another of the concerns was whether or not the revenue service was capable of administering CGT without causing confusion and delays. Over time it has become apparent that South African Revenue Service (SARS) is well equipped to deal with the new tax, and investor resistance has evaporated.
CGT has certainly added another dynamic to the decision-making process of the investor who uses the medium of a share portfolio. Since CGT was introduced we have experienced very buoyant economic conditions, and the shares of companies listed on the JSE have experienced enormous growth in value. As prices rise, the profits to be made on listed equities grow dramatically, as does the CGT liability.
There are three important considerations to remember with CGT.
The first is that in the worst-case scenario (for taxpayers in the 40 percent income tax bracket), you will pay CGT of 10 percent on your profit.
The other consideration is that you currently get an annual CGT exemption on the first R15 000 of profit, which you lose if you do not use it.
The third is that CGT losses can be offset against gains and overall losses can be carried forward into the next tax year.
These points can assist you in the decision of when to sell shares to your best advantage from the CGT point of view, but there are more important aspects to the decision making.
Do not let the tax tail wag the investment dog! One should regard CGT as a "necessary evil" and base investment decisions on investment criteria, not on the tax implication. A good investment decision will stand on its own merit. Beware of the market legends that you hear from your friends, such as: "I might just as well hold on to my shares because if I sell them I will have to pay tax."
If you have done very well in a share and now wish to bank some profit, for heaven's sake do it. How foolish to wait for the price to fall so you do not have to pay tax. Make the right decision based on the correct criteria and always be completely honest in completing your tax return - if you need prompting for this I can assure you that you will get caught out and the worst person to be on bad terms with is the Receiver of Revenue!
In fact, SARS shines like a star for our other state departments to emulate. The huge success and efficiency of SARS contrasts with the complete disaster we find at Home Affairs. SARS has lifted its game year by year and has been tasked with collecting R642 billion this year.
The revolutionary use of technology by SARS is wonderful for individual taxpayers, who can now do eFiling. Those who require physical tax returns will receive them, on request, partially completed with information supplied by employers. It is extraordinary that one department can perform so well while others flounder.
As far as tax is concerned, take the knock on the chin and pay up, but as far as investments are concerned make decisions for the right reasons.
- David Sylvester is the chairman of the Shareholders' Association, telephone 021 686 7567.
This article was first published in Personal Finance magazine, 3rd Quarter 2008. See what's in our latest issue