Q: What are the South African Revenue Service’s (Sars’) tax requirements regarding forex trading? It will be my sole income. Do I need to set up a company? If I intend on immigrating, should I choose a broker in that country now? What expenses can I claim? Will I be a provisional taxpayer?
David Kop - The Financial Planning Institute of Southern Africa (FPI)
Income or capital
The operative words in the question are ‘trading’ and ‘income’. This implies that your intention is to trade forex with the intention of making a profit. As a result, the profit that you make from trading forex meets the defection of gross income in the Income Tax Act, and thus would be taxed as income, based on the income tax tables for an individual. Consequently, any expense that you incur in the production of the income can be deducted.
Foreign exchange allowance
In terms of getting money offshore to trade, you have a R1 000 000 annual discretionary allowance that doesn’t require the South African Reserve Bank’s (Sarb’s) or Sars’ approval. In addition to that, you have a R4 000 000 foreign investment allowance. In order to use the foreign investment allowance you need to apply to Sarb for approval and will also need a Sars tax directive.
As a South African resident you are taxed on your worldwide income and as such will need to declare the profits (converted to rand) in your annual tax return. You would also need to pay provisional tax in August and February every year. It’s important to note that this is not an additional tax but just a mechanism to pay your annual tax, as your income won’t be subject to PAYE.
If you move overseas it’s important to note that if you move without formal emigration procedures, you may still be a tax resident [subject to] South African tax and therefore would need to continue to pay tax in South Africa. Emigration involves applying to both Sarb and Sars to no longer be a South African resident. It is advisable to get advice on emigration as, depending on your circumstance, it may trigger a capital gains tax liability.
Whether you should trade through a company or sole proprietor is based on more than just tax decisions, which are too numerous to discuss in this response. Remember however that if you set up company in South Africa and then emigrate afterwards, the company would still be an RSA-domiciled company and subject to tax in South Africa.
Selecting a broker
Forex intermediaries or advisors must be registered with the Financial Services Board if they provide advice or intermediary services in South Africa. This is regardless of whether the product is local- or foreign-domiciled. Therefore, before selecting a broker, check on the FSB website to see if they are licensed to provide services in South Africa. Likewise if you emigrate, do research on any broker that you select to check that they are correctly licensed.
Please note that the information contained in this response should not be seen as advice in terms of the Financial Advisors and Intermediary Services Act, but I trust that it provides some clarity on the tax position. We do recommend seeking formal advice from a CFP® professional and a registered tax practitioner before implementing a forex trading account.