[Question] When is profit taxed?

[JohnApple]

When a person sells a personal-use item, can the profit somehow be taxed?

Apart from CGT, which is better defined in the literature, if a person sells
something for profit, when will that profit be taxable, and how is it taxed?

Let's say the profit must be counted as part of the person's taxable income,
are there exceptions to such taxation? Like if it is the sale of a personal-use
item?

Will such taxation happen independent of possible CGT being applied?

These are some basic questions that I cannot find a straight answer for
on the web, so I help someone can please point me in the right direction?

[flaker]

Question. Is this personal-use item an one off sale or these sales on a regular basis & they just happen to be profitable?

[JohnApple]

Question. Is this personal-use item an one off sale or these sales on a regular basis & they just happen to be profitable?

Let us assume the worst case scenario of the sale of personal-use items on a regular basis
that just happen to be profitable.

For instance, the prolonged sell-off of personal numismatic collectors items in a person's
personal capacity only, say through Ebay.

[dellatjie]

If it is sold on a regular basis, it is deemed to be your trade, rather than a "capital good" sale.

In that case, the profit less expenses incurred in order to trade, will be taxable.

A good example is when selling a house.

If you sell a house now and, incidentally,another one 5 years later, it will definitely not appear to be a trade.

But should you buy a house, sell it 3 months later, buy another one, sell it again after 5 months etc., the house becomes inventory rather than a capital "expense", which means that the profit, after all expenses incurred (like commission, legal fees, advertising costs) will be taxable.

I hope it makes sense, as I studied tax in Afrikaans, so my terminology is not always up to scratch!

[JohnApple]

In that case, the profit less expenses incurred in order to trade, will be taxable.

So would the taxable profit be added to personal taxable income?

Would CGT also apply in the case of profit from inventory sales?

[dellatjie]

The profit will be added to personal taxable income yes.

CGT will not apply in case of profit from inventory, as this is not a sale that is capital of nature.

[JohnApple]

But should you buy a house, sell it 3 months later, buy another one, sell it again after 5 months etc., the house becomes inventory rather than a capital "expense", which means that the profit, after all expenses incurred (like commission, legal fees, advertising costs) will be taxable.

Is there a line in the sand?

How often may a personal-use item then be sold and not be deemed inventory?

1 month, 1 year, 3 years? And what if it is not the same item, but a different item each time?

[flaker]

i know that in the good old days that shares purchased for investment purposes and which when sold after a period of some years never attracted tax. Am not sure what the situation is to-day.just to clarify, you have been holding these coins for a while now & disposing them when the timing is correct. you're no longer purchasing (otherwise it can be construed as trading).

I'm eager to know what advice our guru tax members will give.

[Willie0100]

When the "GOVERNMENT" steps in....... and...... amongst all other things related to tax.

[JohnApple]

The profit will be added to personal taxable income yes.

CGT will not apply in case of profit from inventory, as this is not a sale that is capital of nature.

Someone without a salary and no other income can then sell 'inventory' to the tune of R50,000+ profit
with the taxable 'income' being less than the threshold, and then has to pay no taxes.

Or SARS can then decide that no it was not 'inventory' (even though it clearly was) and that CGT will apply here,
which means that they can then charge 13.3% tax on the profit above the threshold of R30,000.

Based on these thoughts, can SARS then make a case-by-case decision whether profit is
taxable income or a CGT sale, or are there clear definitions which they have to adhere to?


If someone sells off an entire coin collection in one sale, is it the sale of 'inventory'?

If not, then one can make several separate sales of the items of a collection and
receive payment like anonymous Bitcoins, and then when all items have been
sold one can make a once-off conversion of Bitcoins to Rands.

[CLIVE-TRIANGLE]

Hi JohnApple

Very interesting question posed and a few observations:
1. In tax matters, the intention of the taxpayer with regard to underlying transactions is often the deciding factor. One man's capital is another man's revenue. Quote often the intention also changes somewhere along the line.
2. SARS will frequently make an assessment based on what they believe the intentions were, and then the onus is on the taxpayer to prove or show that it was something else.
3. As far as a private individual is concerned, profit from sale of assets seldom gives rise to CGT. Well known exceptions indeed are coins of gold or platinum (there may be other metals). Basically the test is if the value of the coin is mainly due to it's base metal, as opposed to it's rarity. Shares and unit trust sales always give rise to CGT unless you trade in them, then it's fully taxed.
4. It is a wry observation that SARS will happily class losses are capital and profit in the same dealings as revenue , so it's pointless asking them.

What do you mean by 'inventory'?

[CLIVE-TRIANGLE]

Just to comment further on the house example given by Dellatjie:

I have a client who, during the period 2004 to 2007 bought in the region of 80 houses. That's not a typo. All were bonded. All were refinanced to provide the funds for the next purchase. All had tenants.

In 2008 the bubble burst and the client offloaded 75% of the properties, because the rentals were now substantially less than the bond repayments.

Many of the offloads, but not all, were at a loss.

We submitted all of the profits on disposal as capital; some were only a few months old.

SARS audited the numbers and condoned the treatment because we were able to show that the intention was to acquire the properties, let tenants indirectly service the loans, with a view ultimately owning the properties as freehold.

The important factor was that they had tenants; in other words the assets were generating income and were not acquired solely for capital appreciation.

Intention is very important. Beware attempting to manipulate events to give the illusion of a different intention; it almost always fails.

[flaker]

i'm not savy with matters of tax, so Clive will you please help me understand the above post.Where the houses were sold at a profit, that profit was taxed as capital gain tax. And in the instance of profit/loss on trading of the same houses (rental income less expenses as interest,maintenance) the profit or loss would be declared as such.
Now what happened to those houses that were sold at a capital loss,that is sold at less than what was originally paid for them?

[CLIVE-TRIANGLE]

i'm not savy with matters of tax, so Clive will you please help me understand the above post.Where the houses were sold at a profit, that profit was taxed as capital gain tax. And in the instance of profit/loss on trading of the same houses (rental income less expenses as interest,maintenance) the profit or loss would be declared as such.
Now what happened to those houses that were sold at a capital loss,that is sold at less than what was originally paid for them?

If an enterprise has assets that are used in the production of income, and some or all of those assets are sold, then those profits on sale are regarded as capital gains or losses. The same applies to private persons. Letting of property is "carrying on a trade" and profits or losses on disposal are similarly treated as capital gains or losses (ignoring for now the method of arriving at the profit or loss and the difference in inclusion rates).

So the number of properties and other semantic considerations are of little consequence; the initial intention supported by the evidence holds sway.

The same person also acquired and sold properties in a speculative manner; those disposals were treated as revenue and not capital because there never was any intention that those properties would generate rentals; the bit of rentals generated were incidental to the intention to acquire the properties cheaply and sell them at a substantial profit.

The losses on disposal of some properties were merely set off against those that realised profits, to arrive at a net capital gain which was aggregated with the loss realised by the rental activity.

JohnApple asked if there was a hard and fast rule or if each is treated on it's merits (my interpretation) and the answer is that there is no hard and fast rule.