I am a South African resident and pay SA income tax. I have an international exchange-traded fund (ETF) portfolio with a European bank as the asset manager. The money is invested in various funds (including hedge funds, but not directly in company shares) and I contribute/buy intermittently when I have spare money available. The investment is for long-term financial security.
I have read the article How is tax calculated when you sell an ETF?, published by Moneyweb on December 3, 2015. I presume this would be applicable to my case. However, this information is now more than four years old and deals with local (SA) ETFs, which are regulated by our own Financial Sector Conduct Authority.
Is there an update to this information that would also apply to foreign ETFs and unit trusts? Or would the same reasoning still apply to my case as well? I look forward to our response.
Thank you for your query. It is always easier to give more accurate advice when we know the exact breakdown and detail of the specific investment in question, and would be happy for you to send us this information should you want us to investigate further.
To answer your questions, there have been no major changes to the Income Tax Act since the article in December 2015 that you referenced, with the exception of some amendments to include rates and exemption levels of certain taxes, being:
- Dividends tax increased from 15% to 20% in February 2017; and
- Capital gains tax inclusion rate increased from 33.3% to 40% and the exemption level rose from R30 000 to R40 000 in 2016.
When preparing this answer, we have assumed that you are holding a direct offshore ETF in a foreign currency. An ETF or exchange-traded fund is basically an investment fund traded on a stock exchange, much like trading individual stocks. However, unlike a single stock, an ETF typically tracks a particular index, commodity, bond or blend of securities. As such, your investment would be taxed and treated like any other asset that you own, bearing in mind that the South African Revenue Service (Sars) will tax you on your worldwide income. There are, however, a few things that are calculated differently when the asset is based abroad. These include:
Capital gains tax
ETFs are subject to capital gains tax when sold at a profit. Each year an annual exclusion of R40 000 capital gain or capital loss is granted to an individual. After the annual exclusion is taken into consideration, 40% of the capital gain is then added to your taxable income for the year. However, it is important to remember that if the asset is held in a foreign currency, the capital gain is calculated first in the currency of the investment and then converted into rands. This means that you don’t pay more capital gains tax if the rand has weakened.
Dividends and interest can also be earned in ETFs, and these are usually automatically reinvested. Therefore, if a dividend is paid it will be subject to tax, bearing in mind that local dividends are generally exempt from income tax but taxed at the dividend-withholding tax rate of 20% by the entity paying the dividend.
In the case of foreign dividends, these are included in your taxable income after a basic annual exemption for individuals of R3 700 on all foreign dividends and interest received. However, in accordance to Section 10B, foreign dividends earned may qualify for a full or partial exemption from normal tax with the intention of this section to ensure that the maximum effective rate you will pay to be no more than 20% (in line with local dividend tax rate).
Securities transfer tax
Securities transfer tax would normally be levied on a purchase involving company shares, although ETFs are exempt from securities transfer tax.
Feel free to contact us directly and we will gladly take a closer look at your investment in order to provide more specific advice.