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Tax considerations when selling foreign assets · Tax Break: South African tax for professionals

• 0:11
  Welcome and thank you for joining me for Tax Break.
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  This is a podcast about South African tax, 4 South African tax
• 0:17
  professionals and practitioners. My name is Peter Flanagan and in
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  each episode I share my thoughts with you on a topic or a recent
• 0:24
  development in South African tax.
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  And I tried to do it in short enough period that you can look
• 0:31
  at or listen to the podcast if you've got a few minutes to
• 0:34
  spare or you just need a bit of a coffee break.
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  Now, I think it would be fair to say that the world market and
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  the world economy is quite volatile at this point in time.
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  And there is some instability in the markets.
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  The the reasons for this, we think of a few these, there were
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  some tariffs imposed, trading tariffs imposed by the US
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  earlier this year. At the time when I'm recording
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  this, there's just been attacks on the on Iran's nuclear basis
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  by the US. So I think all of these things
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  contribute to to the volatility. Now you may be asking why talk
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  about all of this in a tax podcast?
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  So in the first few months of this year, so we're about 6
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  months in now, I've had quite a few questions from tax
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  practitioners and taxpayers asking if I sell my foreign
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  assets. And in some cases it's not just,
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  it's not selling foreign assets to place them with local assets,
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  it's just changing the composition of a portfolio and
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  you take some profits along the way so you now realise your
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  profits. What are the South African tax
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  implications that I need to consider now from a commercial
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  perspective before we look at the tax?
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  But I do think it is an important, it's important to
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  look at what what gives you the profit before we go to the tax.
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  So if we take the example that you bought the Tesla share
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  around 2018. So back then these shares were
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  worth about although they were selling for 20 U.S. dollars per
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  share, they are now worth 340 U.S. dollars or more or less.
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  Thereabout Perche and you were it's difficult to believe, but
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  in 2018 the rant was was trading at levels of around 12 rant to
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  U.S. dollar. It's currently trading at around
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  1818 round to U.S. dollar. So if you then make a profit,
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  these two elements in that profit, the one is the fact that
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  there has been growth in the underlying investments.
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  In other words, the 20 to the 314 my example.
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  But there's also, and maybe because the growth was, was so
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  significant, the, the Rand depreciation in the base cost
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  doesn't seem that, that, that big.
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  But you paid back then you paid 20 U.S. dollars.
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  You had to pay 12% for a dollar to, to, to get those dollars.
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  If you are now selling EU recovering your 20 U.S. dollars,
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  you'll be recovering it at 18, right?
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  So there's also a Rand gain element because of the
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  depreciation of the Rand in the. So your profit actually consists
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  of two things, the growth and the underlying investment and
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  the rent appreciation or depreciation depending on what
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  direction it went. So if you're looking at the
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  capital gains tax translation rules, it states that where
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  you've got the natural person or a non trading trust that sells
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  an asset in a foreign currency and also purchased that same
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  asset in the in the same foreign currency.
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  The way that you need to translate that into back to Rand
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  is you need to determine the gain or loss in the foreign
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  currency. Then you need to translate that
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  back to rant at the either the the current year's average
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  rates. In other words, the selling, the
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  year in which the asset was sold, average rate, all the spot
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  rate you can, you've got the choice day.
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  If it's different currencies, then unfortunately you need to
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  translate the expenditure at the right for the expenditure year
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  or the spot right back then and the proceeds for the sale year
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  or the spot rate when the sale takes place.
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  So back to our example on the same currency, because I think
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  in a lot of these cases, especially if you're looking at
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  she's with things like that, it would probably be that you, you
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  are buying and selling in the same currency.
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  So the maths behind it would say that you've got a capital gain
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  denominated in a foreign currency.
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  So in other words, $340 is your proceeds, $20 is your base
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  costs. You've got a gain of a dollar
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  gain of 320 and you translate this dollar going back to rant
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  at 18. The the the raft, right, for our
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  example purposes, in the year of sell that you sold the asset.
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  So what that if if you then apply the you do the maths and
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  you multiply the 18 back into the elements in brackets, you
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  basically get to the point of saying that you can get your
• 5:36
  recognition for your base cost at the current exchange rate.
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  So in, in other words, any gain that you've that you've realised
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  as a result of the Rand depreciation on your base cost
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  will not translate into a capital gain for CCGT purposes.
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  And I think if we're looking at an example that's not as extreme
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  as Tesla, it could be that this is actually quite a significant
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  portion of your gain, right? Then there's a few points I
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  would like to share with you that I've picked up along the
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  way in these discussions and consultations.
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  The first one is that this translation principle only
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  applies to capital gains tax. If you're holding the asset
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  that's trading stock, then the normal Section 25-D translation
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  rules apply. So in other words, you translate
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  your expenditure at the rates when you incur the expenditure.
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  You translate your proceeds at the relevant rates when you when
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  the amounts accrued to you. And so no, I'm I'm sure they do.
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  There could be circumstances or instances where persons are
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  trading foreign shares as on a on a speculative basis.
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  But I think a good example of weight this capital versus
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  trading stock would come up is in in the case of crypto.
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  So where you've got crypto that you bought on a foreign
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  exchange. So in other words, you bought it
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  for a you, you used U.S. dollars to buy the crypto, you're
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  selling it for U.S. dollar amount.
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  Again, the important thing there is that step one is to determine
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  what's the nature of these assets for the tax payer.
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  Now, in the case of crypto, Sasha jesting the CCGT guard
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  that there could be a strong indication just based on the
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  nature of these assets that that amount that accrued to you when
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  you sell it could in fact be revenue.
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  Although I think if you look at the search website on
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  cryptocurrencies, they do also acknowledge that it could
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  sometimes be capital gains tax. But the burden of proof is on
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  the tax payer to prove that this was in fact capital.
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  So I think it's a good reminder that the, the, the, the, the
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  nature of the asset is also going to influence how you do
• 8:00
  the currency translation. Another issue that I came across
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  a few Times Now is the fact that an investment derives its value
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  from instruments or foreign foreign instruments of
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  instruments on a foreign market doesn't necessarily mean that
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  the expenditure and the proceeds were denominated in a foreign
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  currency. And you can only apply these
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  translation rules where you where, where you where, where
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  the, the, the Rand depreciation doesn't result in, again, if the
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  asset was sold in a foreign currency and the quad in that
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  same foreign currency. Now, what where I'm going with
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  this is that there are some Rand products or some investment
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  products that are actually rank products.
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  So you buy them in rents, you sell them in rents, although
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  they derive their value from underlying foreign investments.
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  So in the case of those types of products, you don't apply these
• 9:01
  translation rules. So it's absolutely critical to
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  know what exactly is the product or the investment that you're
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  looking at. So if you take home points,
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  firstly, you need to understand the nature of the asset because
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  that affects your translation rates.
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  Secondly, if the asset is capital you need to determine in
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  what currency did you buy and sell it.
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  If non capital, then we back to 25 D.
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  That's it for today's episode. If you've got any questions,
• 9:30
  comments, ideas, please send me an e-mail.
• 9:33
  If you like the podcast, please subscribe on your favourite
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  podcast platform and tell all your friends and colleagues
• 9:38
  about it. And just reminder, as always,
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  nothing in this podcast is intended to be tax advice.
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  It's only for information purposes.
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  Until next time, goodbye.