The tax implications of investing in a stokvel
From simple savings to investments in shares and property
Stokvels are a common method of saving used by many South Africans; however the tax implications of income earned from a stokvel are not well understood.
Your potential tax implications are dependent on how your stokvel operates. If you are part of a simple stokvel where you contribute a certain amount of money each month and then once a year you are paid out a lump sum with no interest or growth on the amount contributed, there will be no tax implications.
For example, if your stokvel has 12 members, you each contribute R500 a month and one month a year each of you receives R6,000 there will be no tax implications. This is because you are essentially receiving the amount that you put into the stokvel without any growth or interest i.e. you put in R6,000 over the year and received R6,000 in return.
However, you may be involved in a more complicated stokvel that invests your money into savings accounts, shares or property. Let us consider these types of investments separately.
- Savings account
Most if not all of the major banks offer an option where a stokvel can invest money in an interest bearing account. It is understood that the bank will open an account in the name of the stokvel, but any interest paid or accrued to the stokvel’s account will have been received by the members in their own names for tax purposes. You must, therefore, declare the interest you receive from the stokvel to the SA Revenue Service (Sars) and possibly pay tax thereon.
Bear in mind that you are entitled to an annual exemption from tax on interest earned up to an amount of R23,800. In other words, you will need to add the interest earned from the stokvel to your other interest earned during the tax year to determine whether you are liable for tax on the total amount of interest that you’ve earned. If your total interest earned for the tax year is R23,800 or less (including your stokvel interest) you will not be subject to tax on interest earned.
If your stokvel has invested in shares in your individual names (or as a group but the stokvel is not a separate legal entity) you would be subject to possible capital gains tax on the disposal of these shares in relation to the amount that you have received and/or your interest in the stokvel. You are allowed an annual R40,000 capital gain exclusion i.e. if your total capital gains for the year are less than R40,000 there will be no capital gains tax to pay.
You may also receive dividends from the shares held; in this case there will be a 20% withholding tax that is paid directly to Sars prior to you receiving the dividend. Once you have received the dividend, it will be exempt from taxation in your hands.
This is presuming that the shares are purchased in your, the members’ names or in the name of the stokvel (but the stokvel does not have a separate legal entity). If the stokvel is set up as a company there would be different tax implications.
There are some stokvels that will invest in fixed property. It is possible that these stokvels would be set up as a company and the property would be purchased in the name of the company. If this is the case, you would be a shareholder in the company (i.e. the stokvel) and possibly receive dividends from the company. As mentioned before, there is a 20% withholding tax that the company will pay directly to Sars when dividends are declared to shareholders.
Alternatively, if the property is bought in your names, the individuals who are part of the stokvel, you would need to declare and pay tax on the proceeds of the sale of the property as well declare and pay tax on rental income if the property is let.
A stokvel is a general term for a group of people who have joined forces to save and invest more effectively. It may take many forms as people could join together to save in their individual capacity or they could potentially open up a company to do so – such as is likely in the case of a stokvel investing in fixed property.
Your tax implications as a result of being involved in the stokvel are wholly dependent on the legal nature of the stokvel and how it operates.
Please note that this article only deals with income tax implications of a stokvel and not any other taxes such as VAT that may apply.
- Baines is the author of How to Get a Sars Refund and a tax consultant at Mazars