Key considerations for indirect offshore investing

Offshore investing

In times of heightened negativity or political uncertainty such as we’re facing in the build up to our local elections, many investment pundits encourage South African investors to move their wealth offshore. But knee-jerk reactions to bad news or uncertainty are never optimal, especially when it comes to investing – and negative sentiments or fearmongering should never be the catalyst for taking one’s wealth offshore. If you would like to incorporate offshore exposure in your investment portfolio investing indirectly through a local investment platform, here’s what to know.

Diversification: The investment world is a big place and it’s only natural to want to mitigate your investment risks through global exposure. According to the 2022/2023 annual financial statements of all companies listed on the JSE adjusted for their current weight within the index, an investment in the JSE provides investors with 61% revenue exposure offshore, while only 39% is truly earned in South African rands. Having said that, it is important to bear in mind that the JSE has shrunk significantly in the past few years and is now dominated by a few key shares, and it certainly makes sense for investors to look for investment opportunities that are not locally available. Further, given our country’s unique social, political and economic challenges, exposing your funds to a different set of risks creates another form of investment diversification, but keep in mind that money invested in any country is exposed to that jurisdiction’s particular set of challenges and risks.

The mechanisms of indirect offshore investing: Indirect offshore investing allows one to invest in a local unit trust portfolio that has a mandate to invest in foreign assets in a relatively convenient and cost-effective manner. Using their foreign exchange capacity, a local investment platform can invest your rands into a foreign currency on your behalf through an asset swap using their foreign exchange capacity. The South African Reserve Bank permits local fund managers to hold a maximum of 45% of their retail assets under management in foreign assets, generally in the form of feeder funds or Rand-denominated unit trusts.

Tax: Indirect offshore investing does not affect one’s Foreign Investment Allowance of R10 million per calendar year as you would effectively be leveraging your fund manager’s foreign allowance, and therefore no tax clearance certificate is required from SARS. This means that should you wish to take assets directly offshore at a later stage, you will have your full annual foreign investment allowance available to you. Keep in mind that, as a South African resident, you are taxed on a residence basis meaning that you’ll pay tax on your worldwide assets including any income declared on your indirect offshore investments.

Investment performance and reporting: All Rand-denominated funds are priced in Rands and all reporting, performance and valuation are done in local currency. Further, when realising units, your funds will be converted back into Rands and paid directly into your South African bank account.

Retirement funds: While it is possible to expose your retirement funds to global markets, keep in mind that such exposure is limited by Regulation 28 of the Pension Funds Act which is designed to protect investors from taking unnecessary risk with their retirement nest egg. Broadly speaking, Regulation 28 allows a maximum of 75% of your retirement savings to be held in shares, a maximum of 25% in property, and up to 45% in international assets.

Living annuities: Living annuities do not fall under the scope of the Pension Fund Act and are therefore not subject to Regulation 28 and, as such, there is no limit to the amount of foreign exposure you may hold in your living annuity. Please note, however, that funds held in a living annuity cannot be invested directly offshore, which means that if you want to achieve greater offshore exposure in your living annuity you will need to do so via an asset swap, or feeder, fund. 

Estate planning: Unlike direct offshore investing, you are not required to draw up a foreign will for your offshore assets as they do not fall within a foreign jurisdiction. Funds invested offshore via asset swap are not subject to foreign probate laws and inheritance tax, and you can provide for the distribution of these assets in terms of your South African will.

Advantages: Contrary to common misperceptions, investing indirectly offshore is neither complicated nor expensive, and can be done through any local reputable fund manager platform. The minimum investment amounts are generally lower when it comes to indirect offshore investing, and regular investment contributions can be set up via a debt order system. Because your investment does not form part of either your Foreign Investment or Discretionary Allowance, there is no limit to the amount you can invest in this manner and, because reporting is Rand-based, it is generally easier to place your investment in the context of your overall investment portfolio.

Global diversification should form part of your overall investment plan, bearing in the mind that the location of your assets has tax consequences, and it is important to fully understand these before simply investing offshore. Further, depending on your circumstances, direct offshore investing may be more appropriate especially if you are planning to emigrate or work abroad or, for instance, if your children intend to study abroad. Simply put, if your primary reason for diversifying your assets in an offshore portfolio are not aligned with your specific financial objectives, you need to question what you are hoping to achieve. If you are unsure how to proceed with offshore diversification, take time to consult with an experienced investment adviser.

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