Income tax versus Capital Gains tax

Beware of selling any asset within 3 years of buying it!

In South Africa SARS will deem any asset you sell after 3 years from date of purchase as a capital gain/loss and not as income. Why is this important? Because Capital Gains tax is calculated at 10% for individuals instead of the marginal income tax rate of 40%.

Lets look at an example:
Invest R1mil for 3 years and get 10% per year return. After 3 years you will have R1 331 000. If you sell that asset after 2 years and 360 days, you will have to pay income tax of R132 400. If you wait till the next week to sell, you will pay capital gains tax of R33 100.

You save R99 300 if you wait the few days!

So, before you buy any asset, make sure that you want to keep it for at least 3 years. But then you might want to re-consider the investment, and if we are talking about shares, re-balance your portfolio by taking profits on the performers and buying into the next 3 year potential winners.

So what I am saying is that if we only look at financial investments like shares or unit trusts, do not forget about the investment but do not tinker with it for the first 3 years (even SARS agrees on this).

A word of caution perhaps: The Capital Gains Tax rate in other countries can be up to 50%. It will be very easy for SARS to finance the budget shortfall by increasing the current rate of 10%!!!

So, perhaps we should all re-consider our investments and the gains on them every 3 years?!