Exchange Control
1172. Offshore bank accounts
April, 2004
A recent query from a practitioner highlights some of the tax issues facing taxpayers with offshore bank accounts.
The query concerned a resident individual with an offshore bank account which earns interest.
Normal tax
The interest, being taxable in the Republic, must be translated to Rand. The provisions of section 25D of the Income Tax Act (the Act) setting out the exchange rate to be used for the translation have been changed numerous times in the last few years and the rates that apply are as follows:
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Year of assessment ended 28/9 February - |
Exchange rate for translation: |
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2003 |
Spot rate on date of receipt or accrual (different rules apply to income attributable to a permanent establishment (PE)). |
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The taxable income attributable to a PE of a resident outside South Africa is determined in the foreign currency of the country in which the PE is situated (if the financial records of the PE are kept in that currency) and then translated to Rand using the closing spot rate on the last day of the year of assessment or another rate approved by the Commissioner. |
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2004 and later years |
Average exchange rate for the year of assessment whether or not income is attributable to a PE. |
The average exchange rate for the year of assessment is either –
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a (simple) average using spot rates determined at daily, weekly or monthly intervals; or
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a weighted average using spot rates determined at daily, weekly or monthly intervals and taking into account the cash flows of the taxpayer during the year.
Where does one find the spot and average exchange rates?
Spot rates are published on the SARS website (www.sars.gov.za). Many foreign currency websites publish average rates and one of the most useful and user-friendly sites is www.oanda.com.
Editorial comment: Although we are aware that this site has not received the approval of SARS.
Capital gains tax
A capital gain or loss arises on the disposal of an asset. In the 2003 year of assessment there were no CGT implications for an individual holding such an offshore account as the legislation for that year did not address capital gains or losses arising on the disposal of foreign currency. New provisions inserted into the Eighth Schedule in 2002 and effective for years of assessment commencing on or after 1 March 2003 require the determination of taxable capital gains and assessed capital losses on foreign currency. These rules do not, however, apply to persons to whom section 24I applies.
As a result of this amendment, a capital gain or loss may arise in the 2004 and later years of assessment as a result of movements on the resident's offshore account. Whether or not there is a capital gain or loss will depend on whether or not the account falls into the definition of "personal foreign currency asset".
‘"personal foreign currency asset"’ is defined in paragraph 84 of the Eighth Schedule as:
'any foreign currency asset of a person which constitutes -
a) an amount which constitutes a unit of foreign currency in cash or cash equivalent, held primarily for the regular payment of personal expenses; or
b) any one account held in the relevant foreign currency with a banking institution from which funds can be immediately withdrawn, which account is used primarily for the regular payment of personal expenses'.
And ‘"personal expenses"’ is defined in paragraph 84 of the Eighth Schedule as
'any –
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domestic or private expenses incurred outside the Republic in respect of foreign accommodation (excluding the acquisition of any immovable property) or foreign personal-use assets; or
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travelling or maintenance expenses'.
Therefore, if the account is a credit or debit card type of account held or used primarily for the payment of personal expenses then it is a personal foreign currency asset and any capital gain or loss on disposal is excluded from the resident's taxable capital gains in terms of paragraph 89(1)(a) of the Eighth Schedule. In other words, there are no CGT consequences.
If, however, the account is held for investment purposes and is not a personal foreign currency asset then, on disposal (which could arise on withdrawing funds from or closing the account and selling the foreign currency to repatriate the funds back to the Republic) a capital gain or loss must be determined as follows:
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Foreign currency proceeds
That is, the foreign currency value translated to Rand using the average exchange rate for the year of assessment in which the foreign currency asset is disposed of (paragraph 92).
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Less: Foreign currency base cost
That is, the foreign currency value translated to Rand using the average exchange rate for the year of assessment in which the foreign currency asset was acquired (paragraph 90). Foreign currency assets held and not disposed of on 1 March 2003 are treated as having been acquired on that date and the average rate applicable for that year must therefore be used for the translation. If the resident has more than one foreign currency asset or more than one disposal of a foreign currency asset he must determine the foreign currency base cost according to a pro-rata portion of the pool of foreign currency assets.
As a result of these provisions, movements on exchange rates over the period of holding the offshore account will give rise to a capital gain or loss which must be determined when foreign currency from the account is sold. There is no CGT consequence, however, if the resident transfers funds from one offshore account to another account in the same foreign currency.
South African Institute of Chartered Accountants
IT Act:S 1, definition "average exchange rate",
IT Act:8th Schedule, par 84, definition "personal foreign currency asset" and "personal expenses", par 89(1)(a)
