South Africa: New Cases: Is a Forex Dealer Trading Inside or Outside South Africa?

Last Updated: 14 December 2004

By Prof. Peter Surteees

The mass of recent tax legislation and the increasing complexity of business have meant that not many tax cases reported in the past few years have involved a simple enquiry to be dealt with by means of old established precedent from the courts. The recently reported ITC 1779 66 SATC 353 is, however, such a case.

The taxpayer, who resided in Cape Town, was employed on a full time basis by a firm of registered accountants and auditors. During the 2002 year of assessment, after attending a course in South Africa provided by the local franchise holder of a United States entity called Global Forex Trading ("GFT"), he began to trade after hours as a foreign exchange dealer. GFT was a division of a corporation based in Michigan in the United States of America. The facilities provided by the local franchise holder included appropriate computer software as well as a dedicated line for trading on the internet. The taxpayer also required the use of a suitable computer for his trading purposes as, in order to carry on this trade, he had to keep himself informed of political and economic events that might influence exchange rate movements and to study the trends and other information available to him through the software on his computer. In addition, before trading he acquired the necessary Reserve Bank approval, on the strength of which he had transmitted to GFT an obligatory amount of USD1 000 and an additional voluntary amount of USD2 000. These amounts were intended as security for any losses that he might incur from his dealings.

The manner of his trading was that he effected currency swaps with GFT. He would, for example, one day take a short position in USD by selling USD100 000 for an equivalent amount of pounds sterling ("GBP") at the current exchange rate. The procedure was that GFT would make an offer at a particular exchange rate and the taxpayer could, if he found the rate attractive, accept by conveying his decision electronically. Within two days he would effect a counter swap transaction in terms of which he would dispose of an amount of GBP equal to USD100 000 at the rate of exchange ruling at the time of the second transaction. He would then make a loss or profit on these transactions depending upon the movement of the USD-GBP exchange rate. There were no actual transfers of the currencies involved. Alternatively, the taxpayer could also take a long position by purchasing USD100 000 on day one and then effect a reverse transaction within two days. Any profit that he made was credited to his forex trading account with GFT and any loss was discharged from that account. During the course of the year of assessment he transferred a total of USD10 500 to GFT in order to meet his obligations to it.

In his income tax return for the 2002 year of assessment, the taxpayer set off against his other income a loss of R158 964 which had arisen from his foreign exchange dealings. Because there was no dispute as to the fact that the taxpayer’s foreign exchange dealings constituted a trade as defined in the Act, the only issue was whether this trade was carried on outside South Africa as contemplated in the proviso to section 20(1) of the Income Tax Act.

C:SARS refused to allow the set-off on the grounds that the taxpayer was carrying on the trade outside South Africa, and disallowed the set-off in assessing him. The taxpayer’s objection having been rejected, he appealed to the tax court, contending that his trade had been conducted in the Republic.

The relevant part of section 20 provides that, whereas losses from one trade either incurred during the year or brought forward from a previous year may be set off against the income of the taxpayer, set-off is not permitted where such a loss has been incurred "in carrying on any trade outside the Republic".

Of vital importance to his trading success and to the case was his decision-making as to which transactions to enter into and the timing of those decisions. Equally important to the case was the fact that all his trading took place from his home in Cape Town.

There seems to have been consensus between counsel and the court that the various income tax cases, all emanating from the Appellate Division and dealing with the concept "from any source within the Republic", contained useful guidelines for considering the matter here in issue. The first and, as appears from the judgment, most useful case considered was Millin v CIR 3 SATC 170. Mrs Millin, a celebrated author, received income in the form of royalties from sales of her books in the United Kingdom. The taxpayer argued that the source of the income was the UK, because that was where the contract with her publishers had been concluded. However, according to the judgment of Solomon CJ,

"If we apply the same test here it would appear that the source of the whole amount received for royalties was in the Union. It is true that in this case no capital in the ordinary sense of that term was employed by Mrs Millin. It was the exercise of her wits and labour that produced the royalties. They were employed in the Union, and it matters not, on the analogy of the Overseas Trust case, that the grant to her publishers of the right to publish her book was contained in a contract made in England. Her faculties were employed in the Union both in writing the book and in dealing with her publishers, and, therefore, on the test applied in the cases cited, the source of the whole of her income would be in the Union."

The next case considered was CIR v Lever Bros and Unilever Ltd 14 SATC 1, where the court was burdened with the task of deciding the source of interest received in terms of a loan. Watermeyer CJ, in one of his many profound dicta in tax matters, found that "the source of receipts, received as income, is not the quarter whence they come, but the originating cause of their being received as income, and that this originating cause is the work which the taxpayer does to earn them, the quid pro quo which he gives in return for which he receives them".

In CIR v Epstein 19 SATC 221 the facts were that the taxpayer, an agent in Johannesburg, had entered into an agreement with a partnership Hendrickse & Co in Argentina, in terms of which he exported asbestos for sale there by the partnership. In effect, Epstein and Hendrickse & Co were in partnership in this enterprise. The taxpayer contended that the source of his profits from the sales was Argentina, where the sales had taken place. However, the court found that, as all the activities of the taxpayer had taken place in South Africa, and as it was as a result of them that he had earned the profits, their source was South Africa.

Also on point was the decision in CIR v Black 21 SATC 226, where a stockbroker was able to show that he was carrying on two separate and distinct businesses, one in Johannesburg and the other in London, as a result of which the profits from his London operations was found not to be from a South African source. Schreiner ACJ said in his judgment: "But the Commissioner would be entitled to succeed in this appeal if he could show that the only true and reasonable conclusion on the facts found was that the dominant, or main or substantial or real and basic cause of the accrual of income was to be found in Johannesburg".

Finally, in Transvaal Associated Hides and Skin Merchants v COT 29 SATC 97 the taxpayer, a South African company, carried on its business in both Botwana and South Africa. Hides were purchased and cured in Botswana, after which they were despatched to purchasers. The Court of Appeal of Botswana found that the processes carried out in Botswana were the dominant factors in the accrual of the income. Maisels JA, drawing from Schreiner ACJ’s judgment in Black’s case, said: "the position is different when the activities of a person are performed in two or more countries. In such cases, it would appear that the locality of the source must be determined by reference to those of the activities which constitute ‘the dominant or main or substantial or real and basic cause’ of the accrual of income".

After considering all these judgments, the court applied the Millin dictum and found that, although certain elements of the taxpayer’s trading activities took place in the USA, the exercise of his wits and labour played the essential role in his trading. There was no doubt that he had exercised these in the Republic when he made the crucial trading decisions. The application of the "dominant" or "main" or "substantial" or "real and basic" cause tests that had emerged from the other cases cited would, in the view of the court, lead to the same result.

It is interesting that, in all the cases cited, the taxpayer had been trying to show that the source had been elsewhere. In the present case, the decisions were successfully used to show the opposite.

Because this case involved the treatment of an assessed loss in the 2002 year of assessment, section 20A, which was introduced into the Act in 2003, was not applicable. This section provides for the ring-fencing of assessed losses from secondary trades, which the trade in this case certainly was. Under section 20A, taxpayers such as the appellant in this case will have to ensure that they do not incur losses in their secondary trades in three out of any five years. If they do, they will not be able to set off their losses against other income, but only against future profits from the secondary trade.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions