TaxNewsFlash-Africa

September 15, 2009
No. 2009-09

South Africa: VAT Implications of Dealing in Single Stock Futures

In general, it would appear that transactions of single stock futures (SSFs) would be exempt for value added tax (VAT) purposes because a SSF complies with the definition of a derivative. However, the VAT treatment of SSFs is not that certain. A thorough analysis of the manner in which the SSF trading is done is critical to determine the VAT consequences. This, in turn, could affect the entitlement to input tax deductions on expenses incurred relating to the SSF trades.

A SSF trader could, by altering the legal manner in which it transacts, inadvertently change the VAT consequences completely, even though the financial rewards may remain unchanged.

A vendor may, in certain instances, trade in SSFs as principal when it acquires or creates the SSF through SAFEX (the Johannesburg Stock Exchange futures exchange) and issues the SSFs to its client at a margin. The sale of the SSF would constitute a financial service, with the result that the selling price of the SSF would be exempt for VAT purposes. VAT incurred on expenses relating to the trading in SSFs would not be claimable as it relates to the making of exempt supplies.

An interesting question arises when, following commercial considerations, the vendor opts to outsource the trading in SSFs to a third party and only facilitates the transactions between its clients and the third party. The vendor, in this instance, then only benefits by sharing in the profit earned by the third party (who transacts as principal when it sells the SSF). Even though the financial rewards to the vendor could remain the same, a change in the legal manner of transacting could radically impact the VAT consequences.

It could potentially be argued that the profit share received by the vendor on the sale of SSFs is exempt for VAT purposes. Such an argument would be difficult to substantiate when the vendor does not acquire nor sell the SSF as principal, but merely facilitates the transaction and shares the profit earned. The manner in which the transaction is entered into is often evidenced by the accounting treatment—when the vendor only facilitates the deal, the SSFs acquired and sold would often not appear in its books of accounting—the vendor would only recognise the profit share. In this instance the profit earned by the vendor would not be exempt from VAT.

The quid pro quo or purpose for which the profit is earned would need to be determined. Since the vendor merely facilitates the transaction between the principal and its client, the vendor does not provide a financial service to its client. The third party provides the financial service. The profit earned by the vendor would, in all likelihood, constitute a facilitation fee which is a taxable supply. As a result, the vendor would have to account for VAT on the profit share received. While the vendor would be entitled to input tax deductions in respect of expenses relating to the making of taxable supplies, the third-party acquirer of the facilitation service would not be entitled to claim an input tax deduction as the expense relates to the making of exempt supplies.

For more information, contact a tax professional with KPMG in South Africa:

Mabutho Mthembu, + 27 (0) 11 647 8355, mabutho.mthembu@kpmg.co.za

Ferdie Schneider, +27 (0) 11 647 8686, ferdie.schneider@kpmg.co.za

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