If you've been acting on the share recommendations the FSPInvest team delivers every month in publications like The South African Investor, Real Wealth and Red Hot Penny Shares, then you're probably making handsome investment returns right now.
Soon, these investment returns will spark interest from SARS, and soon they'll come knocking asking for their share of your profits.
Your broker is also obliged by law to hand over your investment portfolio' tax statement to SARS - there's no escaping the tax man when it comes to investing.
So, it's important that you know exactly what to do when SARS comes knocking so that you don't pay more than you should and stay on the right side of the law.
Today, I'd like to show you what taxes you can expect to pay on your investment portfolio and when you'll have to pay taxes on some of the profits you make - before you get a surprise letter from SARS telling you that you owe them money.
Once you start selling your shares, expect the tax man to knock at your door
It is important to know that once you start selling the shares in your portfolio for a profit, you’re triggering a taxable event. That means you need to pay tax on it.
I’m going to show you how SARS determines the amount of taxes you need to pay so that you can make smarter decisions and pay less tax.
How to determine what type of profits you made on your shares
According to SARS you’re buying shares for two reasons only:
You’re buying shares for annual dividend income and long-term share price growth. That’s called ‘capital assets’.
You’re buying shares for a quick growth in value and then selling again. That’s called ‘trading stock’. Now, there’s a general rule of thumb you need to be aware of too. This is called the three year rule.
If you hold a share for three years or longer it automatically becomes a ‘capital asset’ otherwise it is seen as ‘trading stock’ by SARS.
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So why is the difference between a trading stock and a capital asset so important when it comes to taxes?
Well, a capital asset is taxed under Capital Gains Tax at 40% while ‘trading stock’ is taxed under your normal income tax.
Let me explain using a simple example...
The best formula to calculate your capital gains tax...
To calculate how much Capital Gains Tax you need to pay you use this formula:
Selling value of shares – Cost of shares and Broker Fees=Capital gain
Add up all your capital gains for the year
Subtract R30,000. (You get a R30,000 capital gains tax exemption every year)
Multiply by 40% (the Capital Gains Tax inclusion rate)
If your gains are less than your Capital Gains exemption of R30,000 you won’t be liable for any capital gains tax.
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Remember that you must pay brokerage fees on your transaction too
The fixed fees and commissions may vary slightly from broker to broker. If you’re buying and selling shares, you have to pay them…
Most brokers charge a fixed administration fee on your stock broking account and a transaction fee when you buy and sell shares. Make sure you find out exactly how much this is before signing up your broker.
There you have it. Now you know exactly how to calculate the amount of tax you need to pay on your investments.
Let’s build your wealth together,
Contributing Editor, Real Wealth
This month in Real Wealth
, I'll show you how to start with just R500 and you could grow your wealth to R88,720.78 in just five years... All of this, tax free! Find out more here...SaveSave