Q: I’d like to invest into shares on the JSE, across all sectors, on a monthly basis. What are the tax implications? What strategy could I use to minimise fees in buying these shares through my bank? I have a long-term (8 to 10-year) investment horizon and I’d like to hold at least R500 000 by 2028.
Reece Morrison - Masthead Financial Planning
Firstly, when investing in shares you need to determine if you have the capacity or time to do so, as it requires you to be actively involved on a day-to-day basis.
If you do not have the capacity or time then you should consider the help of a good stock broker. Please note however that basic research must be done on any broker you intend on using. If commissions and fees become the main focal point with your broker then you need to be concerned, as not all brokers have your best interests at heart but rather are required to meet targets and acquire bonuses.
Brokers can be found on the JSE’s or FSB’s websites.
For a more passive approach, you could consider investing in ETFs and index trackers. These will allow you to purchase and forget about the investment until you’ve reached your investment horizon.
Another investment option that could be considered is investing on the unit trust platform, which collectively invests investors’ money in one fund. There are a vast number of portfolios in which units can be bought and they are looked after by professional fund managers.
Unit trusts allow you to buy units in a portfolio which will already have shares or equity, the risk involved is much less than investing directly in shares as the funds in these portfolios are spread; so if one investment isn’t doing well all your savings won’t be lost.
Choosing low-cost funds, going with passive investments such as an ETF or an index fund, and being aware of how much you are paying in fees can go a long way toward reducing the amount you pay to invest.
On average, you should not be paying more than 0.5% in fees. Remember to compare trading platforms before deciding.
The expense ratio which includes admin expenses, management fees and other costs, such as back office expenses, can average at 1% – so look around and try to negotiate these fees as well.
Income gains are subject to income tax at your marginal tax rate, which may vary between 18% and 45%, depending on the level of your taxable income.
If shares are held as a capital asset for the longer term, any capital gain upon its disposal will be subject to capital gains tax (CGT) at an inclusion rate of 40%.
Capital gains also have an annual exclusion of R40 000.
It is important to note that CGT is not separate from income tax but forms part of it.
The formula for calculating the effective CGT rate would be reached by multiplying the income tax percentage by the CGT percentage which will provide you with CGT percentage payable. For example: marginal tax rate of 45% x CGT of 40% = 18%.
A maturity value of R500 000 would depend on the amount you want to initially invest, the frequency of this contribution, whether once off or on a monthly or annual basis, the investment return or increase in share price as well as tax payable.