Exchange rate fluctuations over the past six months have resulted in Rand depreciation and Rand appreciation of approximately 20% either way. This ebb and flow has led to many financial planners advising investors to transfer money offshore. While this is a very important step in portfolio diversification, investors should weigh up all of the factors when dipping their toes into offshore waters.
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 R10m 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 R10m offshore per year. Investors who wish to invest less than R1mper 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.