How should South Africans fund their Forex accounts?

How should South Africans fund their Forex accounts?

Funding your foreign exchange (forex) account is not quite as easy as funding your local brokerage account. Due to foreign exchange controls (FEC) and regular changes to legislation it can seem like rather a minefield. However, if you are aware of the various options and rules that are applicable, you can have your forex account funded in no time.

How to fund your international forex account

Exchange control has been part of the South African way of life since 1939. There have been many changes and much relaxation of the policies over the last few years. Here is an update on where we currently stand in terms of foreign exchange control legislation.

Since 1997 the SA Reserve Bank has been relaxing FEC, allowing South Africans to take more money offshore legally. The most recent, significant change came on November 5, 2010 when it was announced that South Africans would be allowed a R4million annual foreign exchange allowance.

In addition, individuals can apply annually for access to a discretionary foreign currency allowance. This amount, in the form of a single discretionary allowance, has also grown over time and is currently R1million per adult, and R200 000 per child.

In order to utilise your R4 million foreign allowance you are required to receive tax clearance from the South African Revenue Service (SARS). This involves completing a number of forms and ensuring your personal tax returns are up to date. Contact SARS directly for your clearance requirements.

To apply for the R1 million discretionary travel allowance, you must complete an MP 1423 form, available from all authorised currency dealers and forex desks. No tax clearance certificate is required. Previously, this allowance was strictly a travel allowance and was only be used for four categories, namely: maintenance, gifts, travel and study. This allowance was therefore not an option for funding your forex account.

However, this legislation has recently changed. The Minister of Finance announced in his 2011 Medium Term Budget, confirmed by Treasury on October 27 that the annual R1million discretionary allowance may now also be used for foreign investments. This is therefore your best option for funding an offshore forex account.

The rules regarding offshore credit card transactions are quite clear. Credit card payments can be made for offshore purchases up to R20 000 per transaction. This does not require any clearance or special permission. However this is intended for goods and services only and although many forex traders used their credit cards to fund forex accounts in the past, it is not actually permitted.

Rather use your R1 million annual discretionary allowance to fund your forex investments. It’s straight forward and does not need SARS clearance. If however R1 million is not enough, then you will need clearance and full approval.

If you are planning to transfer large amounts, it may well be worth setting up an offshore bank account first and then funding your forex and offshore investment accounts from there. It does mean that if you want to open additional accounts with other brokers you will not be required to repatriate the funds and then go through the process of getting clearance and transferring the funds out again. Not only is this an onerous and costly process but you are also opening yourself up to possible additional currency risk.

In order to fund your offshore Forex account, first ensure that you use the correct and most appropriate channels to avoid contravening South African Foreign Exchange legislation. Once you have chosen the correct channel then choose how you are going to fund the account depending on the amount of money you plan to transfer and what your specific requirements are.

Fortunate are those who still struggle with exchange control. But for the rest of us R5 million per year should do!