Practice notes
Investing Offshore – CGT Depends Heavily On The Way In Which You Choose To Invest
Recap on when you are liable for CGT
Capital Gains Tax was introduced to the South African Income Tax Act, 1962 (‘the Act’) in October 2001 and is applicable to capital gains made after that date. The Act sets out the basis for taxing the capital gains arising from the disposal of an asset.
Key facts about CGT for investors
- CGT is only payable if the price of the investment (e.g a local or foreign collective investment scheme) has risen since the date of investment. This increase in value is known as a capital gain and only becomes relevant when/if you decide to sell – a portion of or all – your investments. Thus, you decide when you become liable for CGT.
- It is important to note that individual taxpayers can enjoy an annual capital gain exclusion of R40 000. You therefore only pay CGT on the amount above the R40 000 threshold.
- Currently, only 40% of the net capital gain and not the total gain, is included in your annual income. this makes the maximum CGT rate 18% for individuals that pay a maximum 45% marginal tax rate.
- Retirement funds – pension, preservation, and provident funds – retirement annuities and living. annuities are all tax-efficient products and CGT is not payable on investment growth. These are typically referred to as compulsory or non-discretionary savings.
Rand vs foreign-denominated funds
When contemplating an investment offshore, before deciding on the vehicle and/or type of portfolio that will meet your requirements, you need to decide whether you want to invest in:
- A rand-denominated fund; or
- Directly in a foreign-denominated fund by using your foreign investment allowance.
CGT on currency gains
If you invest directly in foreign currency with a foreign manager or through an offshore platform using your foreign allowance, you do not pay tax on currency movement while you are invested. When you sell assets bought in a foreign currency, the foreign capital gain or loss is first calculated and then translated into rands using either the average exchange rate – available on the SARS website – or the exchange rate on the date of sale. On the flip side, you are liable for CGT on the currency gains* if invested in a rand-denominated portfolio.
*Based on the assumption that the rand will depreciate against other global currencies such as the US dollar over time.
An example
John decided to invest R1 million of his discretionary savings in a foreigndenominated fund (no tax clearance certificate required) and another R1 million in a rand-denominated fund. He does not want to go through the formal process of obtaining a tax clearance certificate. What does this mean in terms of CGT when he sells out of both funds/portfolios five years later?
Assumption: On the day of investing, the R/$ exchange rate was R14/$, which depreciated to R18/$ on the date of selling all his units. Also, the equity market posted positive returns over the five-year period.
Rand-denominated CIS
- You invested $71 429 in an equity fund when the spot rate was equal to R14/$
- Five years later, you sell all your units for $100 000 at a spot rate of R18/$
- The result is a capital gain of R800 000 (R1800 000 – R1 000 000)
Foreign-denominated CIS
- You invested $71 429 in an equity fund when the spot rate was equal to R14/$
- Five years later, you sell all your units for $100 000 at a spot rate of R18/$
- The result is a capital gain of R514 278 (R1800 000 – R1 285 722#) #$71 429*R18/$
- The currency fluctuation of the initial investment is disregarded for CGT purposes
Conclusion
The decision of which investment vehicle/fund to consider when investing offshore is not a simple one. A significant issue to consider when a fund is selected is the impact of CGT. It is important to show the client the difference in the CGT calculations between rand and foreign-denominated funds.
INN8 Invest DFM is not a tax professional. Please seek the appropriate assistance/advice from a qualified financial or tax adviser.
Key points in this article:
Capital Gains Tax (CGT) is only payable if the value of your investment has grown, and you decide to sell a portion of or all your investments
No CGT is payable on compulsory savings – only on discretionary money
It is important to also focus on the CGT differences when you invest in a rand or foreign-denominated fund. In a rand-denominated fund you also pay CGT on currency gains (i.e., rand depreciation)