The compliance involved in managing share portfolios has increased significantly. Investing wisely for your clients is complex enough without having to worry about onerous requirements such as dividend tax management, STRATE reporting, Reserve Bank regulations and reporting, and client tax reporting. Are you one of those wealth managers that finds it difficult to comply with these onerous requirements?
Specifically, when it comes to tax reporting, clients that have share portfolios expect accurate and timeous tax statements as this in turn impacts their declarations with SARS. In the absence of an efficient tax calculation and reporting solution, your clients are at risk of mis-declaration of capital gains and losses on their investments. If this is something you worry about then continue reading.
Capital gains tax is the tax paid by a person on disposal of an asset. Giving things away doesn't necessarily exclude you from capital gains tax. In addition, certain disposals are not disposals for tax purposes either. This is not straightforward.
If you are sitting here thinking "I have a perfectly capable financial team that can do the job" perhaps you need to consider that tax reporting is only as good as the underlying data. When combining share transactions from multiple source systems with different data structures and formats, it becomes really difficult to ensure that transactions giving rise to capital gains and losses are being calculated correctly.
This is especially true when dealing with corporate actions because, apart from the underlying data, one has to really understand the sort of research and investigation that is needed to accurately determine the tax consequences. What does this involve?
* For starters, one has to deeply understand the South African Capital Gains Legislation on financial instruments which includes instruments such as equities, bonds and derivatives.
* Once you have achieved this, you need to keep up to date with the relevant tax laws that change every year- a task often outsourced to auditing firms at a very expensive rate.
* Next, armed with this knowledge you investigate the corporate events, but this information is not always publicly available: - or even worse, it is available, but is not accurate for tax purposes.
* Assuming you manage to get through the above, you realise that a corporate event has foreign denominated shares, so you need to do the calculation differently for your individual vs. your corporate clients.
* Lastly, you manage to get through these hurdles, but you discover that some of your clients use the Weighted Average CGT method, others use FIFO, and some use SPID! Where do you turn now?
There are a number of different corporate actions that take place in financial markets which have various tax implications associated with them. More often than not the average asset manager cannot keep tabs on the changing landscape of the rules associated with general tax law, let alone a niche area such as corporate actions.
Some of the things to consider when dealing with corporate actions and capital distributions include:
1. Cash Dividend: This is a cash distribution out of a company's profit which is sometimes subject to Dividends Tax. The dividend generally does not trigger any Capital Gains Tax. However, it is important to note that, in certain instances, when disposing of these shares at a loss, the dividends received could limit some or all of the loss so that it is not fully claimable for tax purposes. In the case of certain property companies listed on the JSE, cash dividends may be treated differently for tax purposes and this needs to be considered.
2. Capital Distribution: This is a distribution out of the company's contributed tax capital. This amount must reduce the base cost of the share which will affect the capital gain made on future disposals.
3. Scrip Dividend: This is a distribution of the company's own shares to its shareholder for no consideration. There is no Dividend Tax, however, the base cost of the shares is deemed to be nil. Thus, future disposals will result in the full amount of proceeds being a capital gain.
4. Dividend in Specie: This is a distribution of an asset other than cash. The base cost of the asset would be equal to the market value of such an asset distributed. The source of distribution would also need to be investigated and determined which will have varying tax consequences depending on the source of the distribution.
5. Dividend Reinvestment Plan ('DRIP'): Often made by a company which offers their shareholders the option to reinvest their cash dividends by purchasing additional shares of the company.
Conclusion
Without getting into too much more detail it is clear just how complex the tax implications can become when dealing with client's share portfolios. A fundamental understanding of the underlying data together with in-depth knowledge of tax law is very specialised - 'specialised' in this context means focused.
If tax compliance keeps you awake at night, you may want to consider outsourcing. The benefits cannot be measured only in terms of just saving money. Tax compliance, risk mitigation and time savings make this model one that adds a more holistic value company wide.