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

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...