Beware share trading taxes

Q: I am a pensioner, having retired nearly ten years ago. Before I retired, I was involved in managing retirement funds, with a mandate for South African equities and bonds. Although I do not receive full time investment information these days, I do have a charting system for South African equities and I use the internet to obtain investment information.

If I were to trade South African equities in my own name, buying and then selling with an average holding period of some 17 days, I assume any realised losses could be offset against realised profits, and if there is a profit, that would be included as income on my tax return, added to my pension, and then taxed. Is that a correct assumption? Would there also be capital gains tax (CGT)?

If I were to trade only the ETFs (SATRIX etc) would that exempt me from trading profits tax?

A: You state that your intention is to trade and also that the holding period is expected to be on average 17 days. The essential question here is whether the receipts from the disposal of the equities are of a capital nature. If one were to argue that the receipt on disposal of the equities is capital in nature, one bears the burden to prove on a balance of probabilities that the proceeds were of a capital nature.

Our courts have dealt with this issue on many occasions – the most recent being on February 9 2016. Judge CHG van Der Merwe confirmed in this SCA case (CSARS v Capstone 556 (Pty) Ltd) that “…our courts have … consistently applied the test that a gain made by an operation of a business in carrying out a scheme of profit-making, is income and vice versa.” By “income” the judge of course refers to ‘gross income’.

The judge continued as follows:

“Where a profit is the result of the sale of an asset, the intention with which the taxpayer had acquired and held the asset is of great importance and may be decisive. In essence, the question is whether the asset was acquired for the purpose of reselling it at a profit and assumed the character of trading stock….”

Applying the law to your scenario, it is submitted that the intention is to make a gain as part of a scheme of profit-making. The short holding period will be a fact that supports this intention. The equities are therefore held as trading stock and the taxable income that results from these transactions will therefore have to be added to your other income (the pension that you refer to) and will ultimately be taxed. It will not also be a capital gain – simply put, because the full receipt is included in gross income and the related expenditure allowed as a deduction (you are carrying on a trade).

We accept that the reference to ‘trading profits tax’ is to the Securities Transfer Tax. In essence this tax is levied (at the rate of 0.25% of the taxable amount of that security) in respect of:

(a) every transfer of any security issued by

(i) a close corporation or company incorporated, established or formed inside the RSA; or

(ii) a company incorporated, established or formed outside the RSA and listed on an exchange; and

(b) any reallocation of securities from a member’s bank restricted stock account or a member’s unrestricted and security restricted stock account to a member’s general restricted stock account.

A ‘security’ in turn means –

(a) any share or depository receipt in a company; or

(b) any member’s interest in a close corporation.

The tax is not payable in respect of a transfer of a security – to the extent that that security is a participatory interest in a collective investment scheme regulated in terms of the Collective Investment Schemes Control Act, 2002.

To the best of my knowledge the Satrix 40 is an index tracking fund, registered as a collective investment scheme and is also listed on the JSE Securities Exchange as an exchange traded fund (ETF). ETFs are listed investment products that track the performance of a group or ‘basket’ of shares, bonds or commodities. These ‘baskets’ are known as indices. An example of an index is the FTSE/JSE Top 40 Index. As such they would not be a transfer of a security and consequently not subject to the tax.