Tax for Investors
Tax for Investors
We can never speak about investing and not talk about tax. There are many types of taxes, but the three that affect investors are Normal Tax (Personal Income Tax), Capital Gains Tax (CGT), and Dividends Tax.
Normal Tax/Income Tax
Normal tax is the tax you pay on normal income, like your salary. There are different tax brackets. The higher your income, the higher your tax bracket. The lowest bracket at the time of writing is 18% for those with an annual taxable income lower than R216 200. The highest bracket at the time of writing is 45% for those with an annual taxable income higher than R1 656 601.
The table below is a South African income tax band for the 2022 tax year.
Capital Gains Tax (CGT)
This is the tax you pay when you sell an income-producing asset like a rental property, shares, or cryptocurrencies. CGT is calculated as follows.
- The first R40 000 is tax-free. So, SARS won’t tax you on anything under R40k profit per tax year.
- The balance has an inclusion rate of 40%. They will then include 40% of the remaining R60k into your tax calculation.
- You will pay tax on R24k.
- If you are in the highest tax bracket, you will pay 45% tax on the R24k.
There are instances where SARS will tax profits on the sale of shares and cryptocurrencies at the normal tax rates. This makes a significant difference. Where you only paid 10.8% on the R100k above, if SARS decides that you are a trader and not an investor, they will tax you at 45% meaning R45k. They essentially include the R100k in your normal income and tax it without the CGT rules.
When will this happen, depends on how you treat your accounts? If you buy and sell often, you are a trader. If you buy and hold long-term, you are an investor. The laws are not very clear in terms of how long you need to hold the shares for. SARS determines patterns.
Do not forget that stock and crypto brokers are allowed in terms of the law to give SARS access to your transactions. If you know you are a trader, declare your profits as normal income. Never shy from approaching a tax advisor if you are unsure.
I keep my trading accounts and investment accounts 100% separate. I invest on EasyEquities, and I trade on Interactive Brokers. If you invest as a family, you can trade on your partner’s account and invest on your account or vice versa.
Dividends Tax
Dividends Tax applies to all South African resident companies as well as non-resident companies listed on the JSE. Dividends tax is a final tax on dividends at a rate of 20%, subject to any reduction in terms of a double taxation agreement. We must note that dividend tax is a withholding tax, this means that is the responsibility of the company to withhold the 20% levy during dividend distribution and pay it over to SARS.