Discover the benefits and practicalities of offshore investing, including strategies for direct and indirect investments, tax implications, and administrative processes. File photo.
There are many benefits of investing offshore. Your investment acts as a “hedge” against a weakening rand and grants you access to an incredibly diverse global market that includes the world’s most successful companies – think Amazon, Apple, Coca-Cola, and Tesla.
Investment experts generally agree that a portion of one’s long-term savings should be invested offshore. The size of that portion needs to be decided in consultation with your financial adviser, taking into consideration your unique personal circumstances and investment goals.
This article focuses on the practicalities of investing offshore. Do you do it directly or indirectly? How much can you take offshore? What admin is involved?
Rudolph Geldenhuys, an independent Certified Financial Planner professional from Durbanville, Western Cape, who recently won the Financial Planning Institute’s coveted Financial Planner of the Year award, examines each of these questions in turn.
Direct or indirect?
There are two ways to invest in offshore assets: indirectly in rands or directly using a foreign currency in which the asset is priced, typically US dollars, euros, or British pounds.
Investing indirectly, you can opt for a local equity or multi-asset fund with some offshore exposure or invest in a rand-denominated unit trust or exchange-traded fund (ETF) that acts as a “feeder” into offshore investments. These feeder funds are created in and managed in South Africa, but the underlying assets are most often dollar-denominated.
Geldenhuys says most people tend to invest in rands. “It’s what we know, it’s what we earn and spend, so it feels like a natural way to invest,” he says.
“Let’s say that for me to reach my investment goals I need to have 50% of my wealth invested in South African assets and the balance invested in global assets. To execute the global investment strategy I am going to use an ETF that tracks the MSCI World Index, as it is a cheap and cost-effective way to invest in global developed markets without having to worry about selecting individual stocks.
“You can invest in two ways: through a local MSCI World feeder fund denominated in rands, or into an offshore fund denominated in US dollars. Investing locally using rands is arguably much simpler. Going into an offshore fund, you must first convert your rands to dollars, with which you then pay the offshore investment company. But it’s easier than you think, and you don’t have to be really wealthy to do this, as many people suppose – you could invest, say, R100 000 in this way.”
Geldenhuys says an advantage of investing directly offshore is that you can reduce your effective rate of capital gains tax (CGT). Say you buy at R100 000 and sell at R200 000 some years later. With a rand-based investment you pay tax on the gain in rands, which is R100 000. This gain includes both the movement of the underlying asset price and the difference in the exchange rate between when you bought and when you sold.
However, if you invest in dollars, your gain, according to SARS, is calculated on the exchange rate at the date of sale. Say you buy units in an ETF at an exchange rate of R15/$ (R100 000 converts to $6 667) and sell at an exchange rate of R20/$ when the units are worth $10 000, giving you R200 000. The base cost for CGT purposes is $6 667, which now converts to R133 340 ($6 667 x R20/$). Therefore, your capital gain is R66 660, which is R33 340 less than in the rand-denominated investment.
Geldenhuys says this advantage does not apply to investments in retirement funds, tax-free savings accounts or living annuities, which are not subject to CGT and other taxes on investments.
How much can you take offshore?
“We’ve seen a relaxation of exchange controls in South Africa. South Africans can take R11 million out of the country each year without breaking any laws. You can take out R1 million without asking permission using your single discretionary allowance,” Geldenhuys says. “Additionally you have a foreign investment allowance of R10 million per year.”
Once your money is in an offshore investment, it is physically abroad and there are no obligations to repatriate it, Geldenhuys says. “That money can be paid out anywhere in the world. However, there are no estate or tax advantages (apart from the CGT advantage discussed above), because as a South African taxpayer, you are taxed on your worldwide income, which includes your offshore income, and your offshore assets form part of your estate.”
He says you also need to consider foreign exchange costs when converting to dollars and again, if necessary, converting back to rands..
What admin is involved?
“Taking money abroad is actually quite simple,” Geldenhuys says. “Bank apps or third-party currency conversion specialists now make it easy to do the currency conversion. Once you’ve sold your rands and bought your dollars, you pay a foreign beneficiary such as an offshore investment platform.
“If you are using your R1 million discretionary allowance, you simply tick a form that asks if you are using this allowance and state that you haven’t used it elsewhere. The bank will approve the conversion to dollars and proceed with your payment to the foreign beneficiary. Once the funds are received by the foreign investment provider or platform, you can then use your dollars to buy units in, for example, an MSCI World Index tracker fund on the platform.”
To use your R10 million foreign investment allowance, you need a tax directive from Sars. Again, this is relatively straightforward, Geldenhuys says. “Let’s say you have R2 million in your bank account after selling a property. If your taxes are up to date and you can prove to Sars and the Reserve Bank that you have the R2 million – they won’t give you a foreign investment allowance for money you don’t have – Sars will provide you with a foreign exchange PIN. When you buy your foreign currency, the provider will ask for the PIN and once you have bought the dollars you can do with those dollars whatever you want.”
* Hesse is the former editor of Personal Finance.
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