Forex tax rule helps sinking rand buoy gains
Given the political climate and the uncertainties that lie ahead, it may be wise to explore every opportunity to benefit from the depreciation of the rand without incurring any adverse tax consequences.
As an individual you, or your non-trading trusts, have the potential to do this.
When you or a non-trading trust sell a foreign-currency asset that you purchased in the same currency, the tax implications are dealt with in paragraph 43(1) of the Eighth Schedule of the Income Tax Act.
The paragraph says the gain or loss incurred is calculated in the foreign currency and then converted into rands.
In this way, any foreign exchange gain will not be considered for tax purposes.
Calculated in foreign currency
As a taxpayer, you can, therefore, make money on an investment even if the investment has not appreciated in value or has even declined in value.
This is best illustrated by means of an example.
You buy 100 shares in Amazon.com in the US for $10 each. You spend $1000 acquiring the shares. At the time the rand/dollar exchange rate is R10/$1. You have paid R10000 for the shares.
You then sell the same 100 shares at the same price at which you bought them. You will receive $1000. However, the exchange rate is now R14/$1 so you will receive R14000 upon sale.
You will not, however, reflect a capital gain in your income tax return (as you bought the shares for $1 000 and sold them for the same price), but you will have received a forex gain of R4000 on the transaction - and it is not taxable.
This type of "profit" is only possible because the capital gain/loss is calculated in the foreign currency and then converted into rands (and the rand has depreciated in value between date of purchase and sale).
Remember, if assets are bought or sold by a taxpayer other than an individual or non-trading trust, or are bought in one currency but disposed of in another currency, the above benefit is not available and the transaction will be dealt with differently.
When you buy and sell foreign assets, you have the option to use the average exchange rate for the year of assessment in which the asset was sold, or to apply the spot rate on the date of disposal.
It must be borne in mind that such tax benefits only apply to assets held by you as capital assets and not as trading stock used to generate an income.
Generally, if assets are held for three years or longer, this would be regarded as an indicator that they are of a capital nature.
Baines is legal adviser and tax consultant at PW Harvey & Co