There are few words in the English language that ignite as much anxiety in the hearts of asset managers and taxpayers as effectively. More so still, when we discuss the necessity of IT3 report submissions.
So, what exactly makes IT3 Reporting a nightmare? We’re unpacking exactly that, and, thankfully, how Singular Systems has developed a way to simplify the lives of brokers and asset managers countrywide.
Any asset manager reading this knows exactly why IT3 reporting can cause such stress. To those who cannot relate, let’s simplify it. If you own investments, you might recall two pieces of paperwork that your broker, financial advisor or wealth manager sends to you every year, around now, during SARS eFiling season:- One shows your income on investments (IT3(b) tax certificate) and the other shows your gains and losses on sale of investments (IT3(c) tax certificate).
Your provider is also required to submit these IT3 reports to SARS so that when you submit your tax return on eFiling, SARS already knows what income you should be declaring in your return.
Complying with SARS business requirements specifications for tax reporting is one thing. The fact that those requirements are forever changing and increasing is another story altogether. In the beginning, SARS demanded IT3 (b) reports from wealth managers. After Capital Gains Tax (“CGT”) came into law then SARS wanted IT3(c) reports. Following that Dividend withholding tax was introduced, then Interest withholding tax, Tax-Free Savings, now Foreign Account Tax Compliance reporting (FATCA) and the list just seems to keep growing.
The calculation game
- Aside from compliance and a regulatory environment that seems to be in perpetual flux, one of the greatest challenges when it comes to getting IT3 reports right is calculating figures correctly.
- In theory, calculating capital gains should be simple, shouldn’t it?
- Proceeds – cost = capital gain, right? If only it ended there.
It gets complicated more quickly than you would realize. As an example, when many identical assets/ tranches are purchased at different prices, and then some sold, it becomes difficult to discern what the base cost would be in order to calculate that CGT.
Law vs IT3 Requirements
South African tax law provides for three different election methods (to discern your base cost), namely: Weighted Average (WAV), Specific Identification (SPID), and First in, First Out (FIFO). The IT3 reporting requirements appear to direct the use of WAV be used as a measure, whilst this is in direct conflict with the legislation (the legislation suggests the use of FIFO and SPID, whilst WAV is acceptable only in certain circumstances).
- In addition, taxpayers can only elect one method per asset class, and need to stick to it consistently.
Different rules for different taxpayers
- Not complicated enough, IT3? We haven’t even started.
- Next, there is a challenge in the different calculations needed for each type of taxpayer, namely companies and Individuals (personal trusts are in the individual category and trading trusts in the company category).
- Individuals pay tax on the gains made on foreign shares - excluding currency gains, while companies pay tax on both the foreign share currency gains and the gains made on those shares. Your IT3(c) should reflect this.
Top tip # 1: In a rand depreciating trajectory, save tax by investing in offshore stocks rather than local.
Top tip #2: Don’t sell shares just before tax year-end to generate a sly tax loss if you are going to repurchase those shares shortly after, or purchased them recently.
Top tip #3: Don’t sell assets to relatives and try to claim a capital loss: not going to happen in SARS e yes!
Loss limitations – they’re a thing.
On top of all of the above, did you know that CGT legislation stipulates that certain losses cannot be claimed under certain circumstances? Sometimes temporarily, sometimes permanently.
Your portfolio management system shouldn’t multitask
We haven’t even started discussing corporate actions provisions. The fact that the asset management systems used in South Africa are not geared towards local tax legislation is a hurdle in of itself. Additionally, locally developed portfolio management systems that have made a rudimentary attempt to compute CGT cause further potential pitfalls. The core function of these systems is portfolio management - as it rightfully should be – and the operators of these systems are investment specialists as they rightly should be – not tax specialists.
What is the result? A half-right tax calculation.
As a broker, how do you account for all of this – and more frustratingly how do you cope with ever-changing legislation that applies subjectively to varying circumstances - in one calculation?
This highly complex environment provides plenty of opportunities for error – errors whose implications can be grave.
Your asset management system was never designed for local tax legislation. What you can do, is combine a tax solution with your asset management systems already in place.
CGT Express is that solution.
Over the fourteen years that Singular has been working within the space of Capital Gains Tax on financial instruments, we have developed a robust system that caters for South African CGT laws, encompasses the different rules for different taxpayers, allows for any permissible election methods and covers most asset classes that are held on capital account.
Additionally, with that much time invested in the area, we have built up a wealth of specialist knowledge and grown a team of individuals driven to provide CGT solutions to our wealth manager and broker clients.
We keep our software up to date with annual tax law changes so that you don’t have to, and build customized integration between our solution and your Asset Management system.
Our team is here to help – whether that means showing you how to do it, or managing the whole nightmare for you. Let us simplify the frustrating complexity of your CGT operations.
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