Exchange control still exists – and it’s a bit of a minefield

  • AnthonyChait
What’s the future of exchange control in South Africa, and what impact does it have on offshore investment?
by ANTHONY CHAIT | Feb 06, 2020

Exchange control is a collection of financial regulations that are aimed at curbing capital flows from a country. They are introduced primarily to stem the possibility of capital flight, which is when money leaves a country in vast amounts in that way depleting the foreign reserves of the country.

South African foreign reserves take the form of gold bullion and foreign currency stockpiles which belong to the state, and are a ready barometer of the wealth and financial well-being of a country.

Anyone can find out about South Africa’s holdings as these figures are published regularly by the South African Reserve Bank (SARB) in what is known quite simply as the GFECRA (Gold and Foreign Exchange Contingency Reserve Account). It’s an important asset on the nation’s balance sheet.

Exchange control was introduced in South Africa in the 1930s, and has been retained ever since. Many frequently question the need for South Africa, in this day and age, to keep these controls in place. They were introduced in the post-depression era and pre-war years, but most countries have long since scrapped these controls either on a gradual basis or via a big-bang approach.

Israel is the best example of this. It chose the big-bang approach. The decision was made overnight, and the next morning, Israelis awoke to find that the shackles of exchange controls were removed. The Knesset took a gamble, yet a well calculated one. If it called it incorrectly, vast sums could have left the country immediately as the horse bolted once the stable door was opened.

In fact, the opposite happened. Money flowed into the country. A great success story indeed.

Another is Margaret Thatcher, who when she came to power in 1979, abolished the controls of 40 years. They were introduced at the outbreak of the war in 1939, and with one swipe of the pen, scrapped by her government in 1979.

South Africa, on the other hand chose the gradual approach. Perhaps afraid by the big-bang method, it has steadily softened the effect of exchange control.

The watershed occurred a decade ago. In October 2010, as part of his mini-budget, the minister of finance introduced measures that represented a major paradigm shift in policy.

The annual travel allowance of R750 000 was changed to a general special discretionary allowance (SDA) of R1 million a year, discretionary in the sense that the limitation of using it for travel no longer applied. Many people innocently contravened exchange control by depositing travellers’ cheques abroad – thinking it was legal – when it wasn’t. Anyone who did so and didn’t avail themselves of the previous amnesty (2003) or special voluntary disclosure programme (SVDP) should still approach the SARB but penalties may apply.

Another change was the foreign investment allowance (FIA), which is currently R10 million per annum and at the time was R4 million, and was originally a once-off lifetime allowance.

This annual allowance is used extensively today by people wanting to invest offshore in shares or even apartments in Israel.

It’s available to anyone who is over the age of 18, and whose tax affairs are in good standing. SARS issues a tax-clearance certificate which nowadays is completely electronic and is issued fairly efficiently in about 14 days.

It’s permissible to bulk the allowances within a family so that each one can invest offshore. For example, a father who has all the money may lend R10 million each to his wife and adult children so a family of four can take out R40 million in this way. Written loan agreements need to be entered into, but these can be simple in form.

Every year between January and December, the allowance can be used with a new, fresh allowance from January in the next year.

In contrast, the R1 million can’t be bulked by a father (or mother) giving or lending the money to others. They effectively become “mules”, and this is frowned upon by the SARB. A tax clearance is not required for the R 1 million, which also runs for the calendar year.

If you use your credit card overseas whilst on holiday, this is deducted from the R1 million.

Interestingly, these limits haven’t been altered in ten years, which hasn’t taken into account the weakening in the exchange rate over the past decade.

For the really wealthy, the SARB does permit amounts above R10 million to be sent offshore.

It’s usual for approvals to be given for amounts of several hundred million rand to be granted. The process here is a little different.

An application, say for R300 million is submitted to SARS which then performs a thorough audit on the taxpayer reviewing past returns and so on. It can take anything between three and six months for approval to come through. However, once approval is granted by SARS, the funds can be sent immediately. Monies exported under this dispensation cannot be settled on a foreign trust. They have to be in the individual’s own name, and the investment portfolio must be sent to the SARB on an annual basis.

So the question can be asked if, effectively, we have exchange controls in place. We clearly do. They remain a minefield to negotiate, and often advice has to be sought before entering into a cross-border transaction.

It’s often asked whether exchange controls will be completely abolished, and if so, when?

From a socio-political point of view, there is an argument that a measure of currency control should remain in place forever. Some may also recommend that these should be tightened so that funds should not flow freely but remain invested in South Africa, possibly in projects that create jobs.

Watch this space.

  • Anthony Chait is chief executive of Zeridium, a niche tax and exchange-control advisory consultancy. He was a non-executive director of the South African Reserve Bank from 2012 to 2015.

1 Comment

  1. 1 Anton Kramer 07 Feb
    Do exchange controls effect a limit in investing in Bitcoin at all?


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