With Nkandlagate, Nenegate, and Zuptagate prompting many investors to take money out through the ‘back gate’, several questions have been raised regarding the process of transferring funds directly offshore and the legislation that investors should abide by.
The flow of foreign currency in and out of South Africa is regulated by the South African Reserve Bank (SARB), while the rules of foreign currency flows are codified in the Exchange Control Regulations which were promulgated in 1961. In order to stave off capital flight the SARB has capped the amount of money that individuals may transfer offshore annually by means of a foreign capital allowance.
Since April 2015, the foreign capital allowance for South African residents (individuals over the age of 18) has been increased to R10 million per calendar year. This meant that, pursuant to a valid tax clearance certificate (TCC) being issued, a South African resident may directly invest up to R10 million offshore per year. Investors who wish to invest less than R 1 million per annum as part of their foreign investments may rather utilise their single discretionary allowance facility, without the requirement to obtain a TCC.
With the implementation of the new tax compliance status system, a resident is able to obtain a TCC from the South African Revenue Service (SARS) directly from e-filing. In order to obtain the TCC, the taxpayer must provide SARS with information on the amount that will be invested, where it will be invested, for what period of time it will be invested, the expected annual return from the investment, and where the money came from in order to make the investment.
After obtaining the TCC, a resident will be able to transfer funds out of South Africa through an Authorised Dealer - a bank registered with the Registrar of Banks that is authorised to deal in foreign exchange. Each of the four major banks (i.e. ABSA, FNB, Nedbank and Standard Bank) is included on this list.
It is of the utmost importance that the necessary steps are followed in order to transfer funds out of South Africa. If a resident invests offshore without adequate documentation, it will complicate the process of repatriation of the investment. Furthermore, the resident will be guilty of an offence and can be liable to a fine or imprisonment (pursuant to the Exchange Control Regulations of 1961).
In addition to these stringent regulations, there are several tax effects to consider when investing off-shore. Most importantly, the application of paragraph 43 of the 8th schedule to the Income Tax Act. It determines when performing a capital gains tax calculation for assets bought and sold in the same foreign currency, the foreign gain/loss on the disposal of the capital asset must first be calculated before the gain/loss is translated into Rand. This means that the base cost of the asset will be translated at the same exchange rate as the proceeds, which results in the currency fluctuation being disregarded for tax purposes.
This is easier explained by way of an example:
Foreign shares are acquired for $1 million when the spot rate is R10/$. The shares are later sold for $1.5 million when the spot rate is R8/$ (i.e. the Rand strengthened). The gain amounts to $500,000 which, for tax purposes, is converted at R8/$. Hence, the capital gain on the sale is R4 million ($ 500,000 x R8). However, the commercial gain is actually only
R2 million [proceeds of R 12 million ($ 1.5 million x R8) – cost of R 10 million ($ 1 million x R10)].
- Taking the same example but have the spot rate equal to R8/$ upon purchase of the shares and R10/$ upon disposal. This results in a commercial gain of R7 million and a capital gain for tax purposes of R5 million. The amount not taxed is the difference between the exchange rate and the cost of the shares in foreign currency [$ 1 million x (R10 – R8) = R2 million].
Timing is paramount and many investors have had their fingers burnt by not carrying out adequate research. Now, more than ever, investors should seek sound financial and tax advice from professionals in order to ensure they understand the full picture.
Tertius Troost, Tax consultant at Mazars Cape Town