YOUR MONEY: Would selling discretionary ETFs attract income tax?

Question:

In “Your Money: Tax-free Investing — Lump Sum or Monthly Deposit?” (March 7-13), Just One Lap’s Simon Brown writes: “The sale of the discretionary ETFs may attract capital gains tax (CGT) if they’re in profit. But you get a R40,000 CGT exemption every year and a gain on a R36,000 sale will be well within that exemption limit.”

Wouldn’t the selling of discretionary ETFs attract income tax rather than CGT as the ETFs were held for less than three years? If so, then one would pay at one’s marginal tax rate.

— Louis

Answer:

The reader is correct: a sale within three years can be subject to income tax rather than CGT, and this has a real impact on the tax paid. Income tax maxes out at 45% for high earners while CGT allows for a R40,000 exclusion every year and then only 40% of the capital gain is taxed, so the maximum possible CGT tax after the exclusion is 18%.

My assumption in the answer is that one has ETFs in the portfolio that have been held for longer than three years and as such are subject to CGT rather than income tax. If in doubt, rather err on the side of caution and build your tax-free account slower, with monthly contributions.

— Simon Brown, Just One Lap

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