Investing offshore simplified

Feel free to reach out to PSG Wealth Manager Carina van Rooyen directly.

Over the years since then the investment landscape has changed drastically, and investing a portion of your available funds offshore is now generally considered an essential component of your investment portfolio, rather than a luxury reserved for a select few.

Why invest offshore?

• Although the JSE (Johannesburg Stock Exchange) is the largest exchange in Africa, it is still relatively minor compared to the other large exchanges in the world (constituting less than 1% market capitalisation of global exchanges). Investing offshore therefore provides an opportunity for diversification into multinational companies that conduct business on a global scale. This enables you to own a portion of the world’s largest and most successful companies including Microsoft, Apple, Nestlé, and Johnson & Johnson.
• With South Africa’s economy being small (contributing only approximately 0.5% to global GDP) and volatile compared with the rest of the world, and subjected to the challenge of ongoing political uncertainty, a sound diversification strategy is to invest offshore in global markets and companies with exposure to a wide range of geographical areas, currencies, and industries.
• We often advise against attempting to time the market. The same applies to attempting to time currency fluctuations, and waiting to move funds offshore when the exchange rate is favourable. As with timing the market, currency movements become increasingly insignificant in an offshore investment portfolio as time passes. However, the rand has weakened against the US dollar over time, and we believe it will continue to do so over the long term (although potentially volatile over the short to medium term).
• Holding funds offshore enables you to fund future travelling expenses, education if children decide to study abroad, and perhaps even living expenses if relocating to another country is one of your long-term goals.

How much should I invest offshore?

The South African investment landscape has been marred by political and economic instability and uncertainty over the last few years. As a result, many investors have hastily moved funds offshore without a great deal of planning in advance. Transferring funds offshore for investment purposes should form part of a proper and well-considered investment strategy and planning process.

No two clients’ portfolios and investment strategies are ever identical – while some may have the capacity and risk tolerance to move all or most of their discretionary funds offshore, others may require all their available capital to provide them with an income in South Africa. In this instance, appropriate advice may be to allocate most available funds to local instruments focusing on income generation.

With the assistance of an experienced and a qualified financial professional, you should consider your needs and goals as an investor, considering your risk tolerance when deciding what portion of available funds to allocate to offshore instruments.

As financial partners to our clients, we aim to structure financial plans that are suited to their needs and ensure peace of mind. Whilst offshore exposure in a portfolio is essential for the portion of funds a client is willing to invest for a period of seven years or longer, investing a portion in conservative, income-generating assets is equally important to service living expenses over the short to medium term.

How can I invest offshore?

There are mainly two ways to incorporate offshore exposure into your portfolio:

1.     Investing in a South African fund with underlying exposure to foreign instruments (doing an ‘asset swap’)

-You may utilise the asset swap capacity of an authorised South African institution to invest offshore.

-Investing via an asset swap enables South African individuals and entities (e.g. trusts and companies) to gain offshore exposure.

-There are no limits on the amounts that may be invested via an asset swap instrument (but the fund or institution itself may be restricted to certain offshore limits).

-No tax clearance or offshore allowance is required.

-Fund performance is reported in rands.

-The proceeds will be paid into your South African bank account in rands.

2.     Direct offshore investment

-You have to utilise your annual discretionary allowance, or obtain tax clearance from SARS, to move funds offshore (more on that below).

-Funds are held in an offshore account or investment and do not have to return to your South African bank account but may be transferred to an offshore bank account in your own name.

What are my options to transfer funds directly offshore?

South African residents over the age of 18 (who live in South Africa or abroad, but who have not emigrated financially) are entitled to the following offshore allowances:

·R1 million single discretionary allowance (SDA)

-Allowance per calendar year (January to December)

-No need to obtain an AIT (application for international transfer / tax clearance)

-Includes, amongst others, monetary gifts and loans, travel allowances, donations to missionaries, any use of your South African debit or credit card abroad.

-Travel allowances for minors amount to R200 000 per calendar year.

·R10 million foreign investment allowance (FIA)

-Approval to be obtained from SARS.

-Valid for a 12-month period from date of approval

-May be used for investment into offshore investment portfolios or accounts, to purchase offshore property and so forth.

·Transferring more than the R1 million SDA and R10 million FIA

-You may apply to the South African Reserve Bank (SARB) for special dispensation to transfer amounts exceeding the above SDA and FIA.

-This process would include application for a Letter of Compliance from SARS.

“Nothing is certain except death and taxes.” – Benjamin Franklin

The tax implications of any investment should always be taken into consideration, regardless of where funds are invested. All taxes on local investments remain applicable to offshore investments – including capital gains tax, donations tax, income tax as well as estate duty. However, the way in which you invest offshore will influence the tax implications for those investments.

1.     Offshore investment in a rand-denominated fund (asset swap)

-Capital gains tax is payable on a rand-denominated investment (whether the gain is as a result of capital growth on the investment, or currency movements).

-Both foreign dividends and foreign interest earned are included in your taxable income.

2.     Direct offshore investment

-No tax is payable on currency movements whilst the funds are invested.

-If you have invested funds directly offshore and decide to sell or switch those funds at some future date, the capital gain or loss will first be determined in the foreign currency, after which the amount of the gain or loss will be converted to rands based on the exchange rate at that point in time to determine the capital gains tax payable.

In some scenarios, investment structures like an offshore endowment (‘wrapper’) may be utilised as a more tax-efficient structure for high marginal income taxpayers – which is one of several ways in which such a structure could benefit a client.

Despite the saying “don’t let the tax tail wag the investment dog,” it is of utmost importance for our clients to carefully consider all and any tax implications associated with specific investment solutions proposed.

Offshore investing and its various nuances are a key focus area for the wealth management team at PSG Wealth Pretoria East and we gladly offer our knowledge and advisory services to clients regarding any existing or planned offshore portfolios where an independent opinion or sound advice may be required.