Wealth through conventional investment principles

Tax within partnership

Taxation of individuals within a partnership arrangement

This is a popular article written for a popular audience. The article provides a simple introduction to taxation within an investment club where the investment club is structured as a partnership to give readers a basic understanding of their liability for taxes. The notes further only explores taxes as it applies to share investments of individuals. Persons must please contact SARS or their own tax advisor or tax practitioner for more information.

 Liability for tax

It is important to note that the club / partnership is not liable for tax and is not required to submit financial statements to SARS on a yearly basis. The liability for tax is however passed on the members of a club / partnership is their personal capacity as individual tax payers. The earnings of the investment club is passed on to each individual member who is required to pay the taxes on their share of the earnings.

Liquidation of shares resulting in a capital gain

The club may want to sell shares with the intention to buy other shares or a member may want to withdraw partially / fully and the club has to liquidate shares to pay-out the withdrawing member and a capital gain is realized on the “disposal” of shares

The capital gain that is realized through the disposal of shares (also capital loss) is allocated proportionally to the individual members in accordance with their individual percentage shareholding in the club.

Internal transactions do not translate into a capital gains

In the event of a partial / full withdrawal by a member, other members of the club may want to buy the shares (investment units) of the withdrawing member to increase their shareholding in the club. No shares are therefore liquidated (exposed of) to raise cash to pay-out the withdrawing member and no capital gain is therefore realized. This is purely an internal transaction and SARS only requires that it be properly recorded.

Capital loss

Any capital loss resulting from the disposal of shares has to be allocated proportionally to members in accordance with their individual percentage shareholding in the club.

 Interest on cash (un-invested cash / cash not yet used to buy shares)

All interest earned on un-invested cask in the club’s investment account must be allocated proportionally to members in accordance with their individual percentage shareholding in the club.

Dividends received on shared held by the club

Dividends are taxed at a rate of 15% and dividend tax is subtracted before the dividend is paid into the club’s trading (investment) account. SARS however still requires that dividends be declared in personal tax returns of individuals. The club will therefore have to allocate dividends proportionally to club members in accordance with their individual percentage shareholding of the club’s portfolio.

Income (as it relates to share investments) from the buying and selling of shares

Shares held as trading sock are ones that were bought for the main purpose of reselling at a profit. Any gain or loss you make on a disposal of a share you held as trading stock will be of a revenue nature.

All gains of a revenue nature have to be allocated to members in accordance with their individual percentage shareholding in the club. (Phoenixclub only invests for the long-term and this is therefore purely of academic interest).

Tax certificates

Accurate records have to be kept of the club’s dealings in shares. Any gains / taxable amounts (capital gains / losses, dividends, interest on un-invested cash and income) has to be allocated to members in accordance with their individual percentage shareholding of the clubs portfolio.

The club has to yearly issue tax certificates for the year of assessment to all its members for use in their personal tax returns. The IT3(B) issued for the account of the investment club by the financial institution who operates the BDA account of the club must be used as the basis for preparing the tax certificates of members and all amounts must be reconciled back the IT3(B) of the club’s account. SARS may request information is this regard from the club.

Each member of the investment club is required to declare their allocated share of the gains received from investments made by the club in his / her personal tax return

Allocation of taxable amounts

The stake (percentage shareholding in the club) of members will vary from month-to-month as a result of new amounts invested and partial withdrawals by members. All taxable amounts (capital gains / losses, dividends, interest on un-invested cash and income) will for this reason have to be allocated to members, proportionally in accordance with their shareholding in the club, using the date of the transaction that resulted in the taxable amount.

Use of annual exclusion

Each member in his / her has personal capacity as taxpayer has an annual exclusion amount of R30 000 (2014 tax year) for the purposed of capital gains tax liability.

A club with for example ten members, each with an equal share of 10% in the club, and an accumulated total capital gain of R300 000 in a particular year of assessment will distribute R30 000 of the capital gain to each member and no capital gains tax (CGT) will be payable by any of the members (provide members do not have other capital gains from any other sources)

Accounting requirements

It should by now be clear from the foregoing that the accounting requirements becomes quite onerous and accompanied by a fair amount of admin. The accounting has to be 100% accurate and up to date at all times. The superior tax advantages of the partnership arrangement however makes up for this and it is well worth the effort

Favourable tax regime

The partnership arrangement creates an extremely favourable tax regime. Proper planning, structuring and timing of transactions will therefore further boost the growth performance of the club’s portfolio.