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Taxation On The Disposal Of Shares

01 November 2008   (0 Comments)
Posted by: Author: Jurie Wessels
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Taxation On The Disposal Of Shares

When shares are sold within three years of their purchase - and they were bought with the intention of selling them within that period - the gain on the shares attracts income tax.If they are sold after they had been owned for more than three years the gain attracts capital gains tax.The capital amount (i.e., the original purchase price) portion of the proceeds from the sale of shares attracts no tax.

We often receive queries from investors in Capital Investments’ property portfolio regarding the tax that will have to be paid when they withdraw from their investments.This article is an attempt to set it out in layman’s language.Investors who want further information should contact their financial adviser and/or tax consultant.

Section 9C of the Income Tax Act, read in conjunction with section 9B,deals with the tax status of the proceeds from the sale of certain shares.The definition includes the sale of shares such as those of City Capital SA Property Holdings Ltd – the vehicle through which clients invest in Capital Investments’ property portfolio.

In terms of those sections, receipts from the sale of shares held for three years or longer will be deemed to be of a capital nature.However, it does not mean that shares sold within the three-year period are of a revenue nature.The principal determinant of the manner in which sales within three years will be dealt with is the intention with which the taxpayer had acquired the shares.

That issue is dealt with most clearly with regard to Capital Investments’ income clients, the people who had invested in the Equity Release Plan.The income from the Equity Release Plan is generated via the regular (monthly) sale of shares.It is clear that such clients bought the shares with the express intention of selling some the shares within three years.When they do the gains from those shares will be taxed as income.

It is important to emphasise that it is only the gain from the shares that will be taxed as income.If an investor in the Equity Release Plan has had 20% increase in the share price since the original investment was made,only one fifth (or 20%) of the "income” generated from the sale of shares is represented by a gain in the share price.Four-fifths is simply a return of the original capital.Therefore, only one fifth of the income stream received by the investor will be subject to income tax.

Once the investment has passed through its third birthday the gains will be taxed as capital gains.If the share price has doubled since the investment was made only half the "income” from the Equity Release Plan is subject to tax,the other half being a return of capital, and the taxable half will be taxed with CGT.

It should be clear from the above that the Equity Release Plan is an immensely tax efficient structure. Only a portion of the income received is subject to any tax and, after three years,that portion is subject to tax in terms of CGT – which is much more favourable than income tax.

Source: By  Jurie Wessels (TaxTALK)


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