90 replies to this topic

[dominant]

Ok, so you operate as fund manager in a sense. you do a mark to market for open positions to determine your assets.

 

If you have 2 accounts. 1 for trading and 1 for long term investing, plus lets say other investments eg physical property, a Picasso or two.

Do you now need to register ALL assets or only those involved in the trading (income generating) activity.

 

Cheers

 

 

Hi gamma,

 

All assets and liabilities, but you don't have to mark to market. You only have to disclose your assets at COST, including your bank balance, home, mortgage, loans etc. All of these at cost (bank balance at mortgage / other loans at their values at year-end).

 

You'll see on the Feb 2013 tax return (don't know if 2012 also did it, can't remember) once you tick the box asking "do you produce any income from a business other than remuneration from an employer" your statement of assets and liabilities will automatically appear as one of the pages to complete on the return.

 

If you're just an investor, ie. not trading shares in a profit making scheme, then you won't tick that box since you're not "producing income", you'll eventually produce "capital gains", but there's a separate box to tick for that, and you only tick that in the year that you have a disposal.

 

If you have two accounts, one for trading and one for investing, you'll disclose on your statement of assets and liabilities under "trading stock" or "inventory" the cost of the open positions, and under "investments (listed)" the cost of your investments. I can't remember all the names of the boxes since I haven't completed a tax return in the last few years, but you'll get the jist of it.

 

What SARS does with this information works as follows:

 

Yr 1 you disclose net assets (all assets less liabilities) of R100,000

 

Yr 2 you disclose net assets of R500,000

 

Now their analytical test says you obviously earned AT LEAST R400,000 during the year whether it be from donations, employee remuneration, trade etc. Obviously they'll expect you earned more, since you should have a reasonable living expense as well which won't be indicated on your return.

 

If in Yr 3 you disclose net assets of R5,000,000, and you only disclose income of only R1,000,000, their system will probably flag you for audit.

 

It gets rather technical but this is just another one of their tricks to flag people for audit... I've completed tax returns for people before where living expenses according to this calc works out to R400,000 per month (which is the in fact the case for some), and as long as it's relatively consistent with the previous year, SARS won't be suspicious. If it's much less, they'll expect less income, if it's more, they'll expect more income, but with any large variances we usually get a query.

 

I've actually had a phonecall from SARS a few years back after submission of such a tax return during my article days, and as a clerk I was obviously slightly stressed about this person from SARS giving me a ring about this guy earning R8m for the year and that I would now have to explain how his balance sheet works etc. But the only question he asked was "How does someone earn that much income, what must one do?".

 

High income earners like these usually have quite simplistic statements of assets and liabilities though. Usually only a car or two, a bank balance, some furniture and loans to and from various trust structures.

[gamma]

Yes gamma, your formula is correct

 

Your assertion re declaration is incorrect though, since new practice by SARS states that if you earn income from a business other than remuneration from an employer, you are required to disclose your assets and liabilities as at year end. Therefore on the tax return you will disclose the cost of the stock you hold at year end, although this won't have any tax liability effect. SARS just uses your balance sheet to determine whether the income/expenses you declared seem reasonable.

 

Their system has an analytical test it performs to determine your monthly living costs, and any unreasonable spikes therein. I won't go into the technicalities of this though.

 

Ok, so you operate as fund manager in a sense. you do a mark to market for open positions to determine your assets.

 

If you have 2 accounts. 1 for trading and 1 for long term investing, plus lets say other investments eg physical property, a Picasso or two.

Do you now need to register ALL assets or only those involved in the trading (income generating) activity.

 

Cheers

[dominant]

Yes gamma, your formula is correct

 

Your assertion re declaration is incorrect though, since new practice by SARS states that if you earn income from a business other than remuneration from an employer, you are required to disclose your assets and liabilities as at year end. Therefore on the tax return you will disclose the cost of the stock you hold at year end, although this won't have any tax liability effect. SARS just uses your balance sheet to determine whether the income/expenses you declared seem reasonable.

 

Their system has an analytical test it performs to determine your monthly living costs, and any unreasonable spikes therein. I won't go into the technicalities of this though.

Edited by dominant, 15 August 2013 - 09:13 PM.

[gamma]

Thanks dominant.

 

So humour me for a second as I apply my groundbreaking formula to your example...but lets take out brokerage/trading costs for simplicity..

 

Sale price - Cost Price - all Trading Costs = Nett Profit (or Loss)

 

Yr 1

Bought Stock for R100

 

Yr2

Do nothing

 

Yr 3

Buy some more stock for R1000

 

Yr 4

Sell all for R2000

 

Sale price (R2000) - Cost Price (R1100) = Nett Profit (900)

 

Up to yr 4 I didn't declare anything to SARS as I had no tax event.

For the Tax yr 4 I declare as follows

add R900 to my taxable income and pay my marginal rate on it.

 

This all does seem really simple. I hope I'm not missing anything important here. 

 

Cheers

 

ps, For the sake of simplicity I neglected to  declare the gains from the units I bought in yr 1 as Capital Gains, which I was entitled to do as I held longer than 3 years.

Edited by gamma, 15 August 2013 - 09:06 PM.

[dominant]

Cryptic as always. Never understand what you are saying or mean.

 

Orca, the basic accounting would be:

 

In year 1, you purchase R100 worth of stock at cost, and at the end of the year, it's worth R200, but you don't sell:

 

YEAR 1

 

Sales Rnil

Cost of sales Rnil (opening stock (Rnil) plus purchases (R100) less closing stock (R100))

 

Even though it's worth more, you don't revalue this in your stock, as you're working with cost here.

 

In year 2 you don't do any purchases or sales (and assume stock value now R300):

 

YEAR 2

 

Sales Rnil

Cost of sales Rnil (opening stock (R100) plus purchases (Rnil) less closing stock (R100))

 

In year 3 you purchase another R1000

 

YEAR 3

 

Sales Rnil

Cost of sales Rnil (opening stock (R100) plus purchases (R1000) less closing stock (R1100))

 

In year 4 you sell all for R2000

 

YEAR 4

 

Sales R2000

Cost of sales R1100 (opening stock (R1100) plus purchases (Rnil) less closing stock (Rnil)

 

Gross profit = R900

 

This is basic accounting, you never add the opening stock to your purchases (and therefore obtain a larger purchases figure), they are separate line items in the sum you do to get to cost of sales. Purchases is ALWAYS only the purchases you make in a year.

 

In this example I neglected brokerage to show the principle, but usually one would capitalise it to the cost of the stock, hence increasing the purchases.

 

You can deduct as "other" or "operating expenses" over the years items such as internet costs, computer wear & tear, subscriptions and other expenses pursuant to the production of trading income, and in years you don't make any sales, you'll be creating a tax loss, and in the year you sell, you'll (hopefully) cover this loss.

 

All of the above assuming you're a trader though.

[orca]

Orca i dont think you understand the mechanics of this. No such thing as open stocks rolling over.. Its all in the closing stock figure!!

Cryptic as always. Never understand what you are saying or mean.

[orca]

You guys still don't get it. If SARS sees you as a trader then you are running a "business". You will have to treat it as such. Opening stock and Closing Stock will be treated the same as your "trading" stocks as if you are a 7/11 store.

At the start of tax year your open stocks from the previous year must be added to your Purchases for the ongoing year.

By the end of this same tax year, the stocks that have not been sold must be deducted from your Purchases to be added on for the following year as Purchases.

 

 

[gamma]

I do have a rolling stock come to think of it.

Ellies has been rolling downhill for awhile now.

I prefer climbing stocks btw

[HDB]

You may be getting away with tax using grade 6 stuff like selling chappies at school but they will audit you eventually. You cannot buy and sell stocks like you said and let the open stocks just roll over into the next year and just carry on.

You have to close all trades and reopen them the following day after tax year end.

Orca i dont think you understand the mechanics of this. No such thing as open stocks rolling over.. Its all in the closing stock figure!!

[@sirgrantfleming]

I don't think HDB and gamma quite get it. It is not just profits and losses traded during the year. What about Opening Stock and Closing Stock? You have to close your books at year end and open anew. It is not a boereworse stand you are operating.

Hey Orca - If you are holding an equity portfolio, you do not "close" it or anything like that - Whatever equities you hold you hold, you only realise a gain or loss when you sell, and only then (in that tax period) are you required to declare the gain or loss - It doesn't get calculated daily, yearly or in any other fashion - hence why the experts say "buy but never sell"

 

In fact, your bank/broker should be giving you an IT3b or similar with your gains, losses and interest that must be included in your tax return information, if requested by sars. This is mandatory from your institution and will have the relevant values that you need to plug into efiling.

Edited by @sirgrantfleming, 15 August 2013 - 06:49 PM.

[orca]

This is grade 6 stuff Orca 

You may be getting away with tax using grade 6 stuff like selling chappies at school but they will audit you eventually. You cannot buy and sell stocks like you said and let the open stocks just roll over into the next year and just carry on.

You have to close all trades and reopen them the following day after tax year end.

[orca]

I don't think HDB and gamma quite get it. It is not just profits and losses traded during the year. What about Opening Stock and Closing Stock? You have to close your books at year end and open anew. It is not a boereworse stand you are operating.

 

[gamma]

Finaly got sorted. No matter how complex your portfolio looks, it is a simple matter of doing the following.

From your year end analysis report.

Deduct all closing stock at cost from Purchases if you purchased them in that year.

Add opening stock at cost to Purchases.

Deduct this amount from Sales and you have Gross Profit.

Add Sales costs and Purchasing costs together plus internet costs.

Deduct this from Gross Profit and you have Net Profit.

 

 

Am I missing something?

 

I use the following (ver complicated) formula:

 

Sale price - Cost Price - all Trading Costs = Nett Profit (or Loss)

 

If a trade then taxed at marginal

If an investment, then CGT

 

 

 

 

The year in which the profit or loss is realised indicates the tax year in which to record it.

[HDB]

What? No applause!!!

This is grade 6 stuff Orca 

[orca]

Finaly got sorted. No matter how complex your portfolio looks, it is a simple matter of doing the following.

From your year end analysis report.

Deduct all closing stock at cost from Purchases if you purchased them in that year.

Add opening stock at cost to Purchases.

Deduct this amount from Sales and you have Gross Profit.

Add Sales costs and Purchasing costs together plus internet costs.

Deduct this from Gross Profit and you have Net Profit.

What? No applause!!!

[orca]

Finaly got sorted. No matter how complex your portfolio looks, it is a simple matter of doing the following.

From your year end analysis report.

Deduct all closing stock at cost from Purchases if you purchased them in that year.

Add opening stock at cost to Purchases.

Deduct this amount from Sales and you have Gross Profit.

Add Sales costs and Purchasing costs together plus internet costs.

Deduct this from Gross Profit and you have Net Profit.

 

[dominant]

Thanks dominant

 

Pleasure gamma. You can speak to Errol there (he's one of the partners and can probably refer you to a manager who can assist). They'll be able to assist with any advisory needs you may have, but remember you'll be working with CAs, which is more expensive than ordinary accountants, but at least you'll be getting what you pay for

[gamma]

www.bakertillysvg.co.za

Thanks dominant

[orca]

Orca use simple logic as if you own a business. If you own a tea room , how do you do your income statement? Sales less cost of sales for gross profit right? So if you bought goods for R1000.00 and sold  R800.00 at cost, you will have a closing stock of R200.00 at cost. You cannot take the Closing stock at selling price.  Same as shares. If you bought R1000.00 worth of shares and you have not sold any at year end, your profit will be zero.. Cost of R1000.00 less closing stock of R1000.00. You cannot value the share at the year end at the year end price. It has to be at cost. You will only make a profit when you sell!! Simple logic....

I see your logic HDB. How did you know that I have a coffee shop? Thanks.

[orca]

Thanks Dominant. Good advice. Will see what happens and post back.