Capital Gains Tax on Foreign Assets

As the tax season is upon us and we see an increasing amount of assets being bought offshore we want to shed some light on the Capital Gains Tax implications of these assets.

Below is an extract from the “Comprehensive Guide on CGT” on the SARS website:

Assets acquired in foreign currency [s 9H(7)] For the purposes of s 9H(2) and (3) the market value of an asset must be determined in the currency of expenditure incurred to acquire the asset. This rule is of relevance when applying para 43. By ensuring that the proceeds and expenditure are in the same foreign currency, individuals and non-trading trusts will translate the capital gain or loss in foreign currency to the local currency in the year of disposal under para 43(1).

In essence what this means is that any currency moves are not taken into account when assets are purchased in foreign currency, but not necessarily foreign assets bought in Rand terms. Below an illustration.

Coronation has two fund namely the Coronation Global opportunities Fund, which is denominated in US Dollars and the Coronation Global Opportunities Feeder Fund, which is denominated in Rand. A feeder fund is  a fund that holds one other fund an in this case the Feeder fund holds the US Dollar fund and is just converted to Rand and sold on various local platforms.

We have two investors both investing R1 million. The one will buy the ZAR fund and the other the USD fund.

On 2 March 2015 Investor A buys R1 million worth of units in the Coro Feeder Fund (ZAR) at a price of R80.6083 and receives 12 405.67 units. Investor A decides to sell his units on the last day of the Tax year (29 February 2016) when the Unit price is R94.90 and he receives R1 177 324.17, this leads to a capital gain made of R177 324.17 of which 40% would have to be included in his taxable income.

On 2 March 2015 Investor B buys R1 million worth of Dollars, at an exchange rate of $/R11.7495 he receives $85 110. On the same day he buys into the Coro Opportunities Fund ($) at $15.0182 per unit and receives 5 667.12 units. Investor B decides to sell his units on the last day of the Tax year (29 February 2016) when the unit price is $13.0858 and receives $74 158.85, this leads to a capital loss of $10 951.15. This loss is converted at the exchange rate at date of sale (exchange rate on 29 February was $/R15.74) and the loss to be added to his CGT calculation is R172 449.95.

As you can see there is a vast difference between two funds that hold exactly the same underlying assets mainly due to the exchange rate. For the 2015 tax year it would have been beneficial to have invested directly offshore as the Rand weakened so ensure your accountant takes this into account. Just bear in mind that the currency could go the other way in future and then the exercise would have been reversed.

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