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Covid-19 and emergency share sales – where do you stand with the taxman?
As South Africa faces another dreaded lockdown level 4, albeit adjusted, many people will be relying on their assets to sustain their livelihoods.
With the tax-filing season opening on 1 July, there is no doubt this year’s assessment will need to take Covid-19 into account, especially in the context of asset disposals, and particularly shares.
While trying to realise capital assets (rather than assets of an income nature), it is important to know there might be some relief when share assets have been sold.
Let me explain. A paramount distinction needs to be drawn between amounts of a capital nature as opposed to a revenue (or income) nature. Reason being, non-capital amounts are subject to tax at a higher effective rate compared to capital profits. In the case of natural persons, the maximum effective rate for capital gains is 18% (compared to 45% on revenue gains); companies are taxed at 22.4% (compared to 28%) and trusts at 36% (compared to 45%).
By virtue of the above, a taxpayer would undoubtedly want share profits classified as to that of a capital nature.
It therefore comes as no surprise that section 9C of the Income Tax Act 58 of 1962 is often referred to as a safe harbour rule. It states that where equity shares (that is typically your listed shares) have been held for a period of at least three continuous years, any amounts received in respect of a share sale must be deemed to be of a capital nature. Consequently, any gain would constitute a capital gain. Section 9C does not require an election and its application is automatic and compulsory.
So, whether you are contemplating a sale of shares in the 2022 tax year or have sold shares in the 2021 tax year – section 9C might find application and offer a helping hand.
The crux of the matter is not so much what happens after the three-year period, but to rather ask: What are my realities when selling shares held under this said threshold period of three years? A lost job attributed to Covid-19, for instance, may have necessitated the freeing up of these funds.
It is important to note that assets held for less than three years will not always amount to income, as there is no prescribed provision or any Act binding a taxpayer to a said outcome. In essence it boils down to you, the taxpayer’s intention. The hurdle to overcome is that intention is a subjective notion.
As a point of departure, the default capital against revenue guidelines is to be followed to classify the shares. For example, where shares have been purchased and sold as part of a scheme for profit-making, gains will be regarded as revenue in nature. Meanwhile, an occasional sale of shares yielding a profit suggests that a person is not a share trader engaged in a scheme of profit-making.
The “slightest contemplation of a profitable resale” (which is most likely always the case when shares are bought) is also not necessarily determinative, but shares sold for a profit very soon after the acquisition is an indication of the potential revenue nature of those profits. However, that measure loses a great deal of its importance when there has been some intervening act, for example a forced sale of shares.
Whether Covid-19 can constitute a forced sale will therefore have to be individually evaluated with reference to each taxpayer’s purpose and their circumstances.
In concluding, it is entirely possible for you to hold your shares for less than three years, yet for the sale to be taxed on capital account. It is important to know the applicable provisions so as not to be caught off guard by any unintended tax consequences this tax filing season.
