The markets are quite volatile and it may be advisable to redeem certain investments which have done well.
We had one client who queried his Capital Gain of R240 000, even though his entire investment value was R272 000! How could that be? Well, in 2004 he invested R32 000 and nothing further since, so over those years it grew from R32 000 to R272 000.
Taking the above example, which is quite extreme, let’s do the CGT calculation and then consider the question.
Ignoring the R40 000 CGT annual exclusion that each taxpayer enjoys, the maths looks like this:-
- R240 000 Capital Gain is translated into taxable income at a rate of 40%
- Therefore R240 000 becomes R96 000 taxable income in your tax return. (240 000 x 0.4)
- Let’s assume that your taxable income is taxed at the highest of 45%:-
- Then the R96 000 taxable income becomes R43 200 actual tax payable. (96 000 x 0.45)
- So in this example, if the client was to redeem the investment he would net R228 800, after tax.(272 000 – 43 200 = 228 800)
However in the real case, the client is a pensioner and his marginal rate is 26% which would result in less tax payable, i.e.,
R272 000 less R24 960 (tax) = R247 040 which is more than the example of R228 800 above!
(96 000 x 26% = 24 960)
The high income earner with the 45% marginal tax rate will reduce his investment proceeds by about 16%, while the pensioner will only reduce his investment proceeds by about 9%.
There are various factors to consider whether to sell or not. They are:-
If you DO NOT sell – your investment position may not be the best. However, you have more capital to generate returns, so better to stay put and hope for better things in the longer term? Could the present investment lose more in negative market conditions than the capital gains payable? Will the CGT inclusion rate increase in the future?
If you DO sell – after paying the tax, you have less to invest. Will the new investment do better than the present one to justify redeeming and reinvesting?
The above are extreme examples and more typically the CGT effect is not 16% or even 9%, often it is 8% or less, even zero.
Also remember that each taxpayer gets a R40 000 CGT exclusion every year so that the first R40 000 gains is excluded from the calculations, resulting in less CGT to pay. You may also use Retirement annuities to mitigate against this tax.
So the question still remains. To sell or not to sell? That is a question only your Financial Advisor can advise on, based on your unique circumstances.
Nick Russell
Certified Financial Planner CFP®
Please note: This article does not constitute advice