Most investors seek offshore investment opportunities to improve diversification, provide for future liabilities or seek alternative market conditions that are not available locally, and there are a number of ways to achieve these goals. Let’s unpack.
For the sake of context, it is important to keep in mind that South Africa currently makes up only around 0.7% of the global GDP. As such, diversifying one’s investments across international markets and economies can create a distribution of risk and volatility in one’s portfolio that is less concentrated than a pure South African allocation. In this regard, keep in mind that the South African stock exchange is dominated by the major commodity producers together with a combination of Naspers and Prosus, and this makes our investment market quite sensitive to economic conditions that affect these businesses.
In circumstances where an investor is likely to incur his expenses in foreign currency, it may make sense for that investor to build an offshore portfolio in the jurisdiction in which he intends to live and spend – which would primarily involve hedging against a volatile currency exchange. Where an investor is contemplating retiring overseas, emigrating, or having children who are likely to study abroad, setting up an offshore portfolio in that jurisdiction would be sensible. A significant benefit of investing offshore is that it allows local investors to expose their funds to selected regional opportunities in economies that are stable and therefore more certain – keeping in mind that many sizeable industries, such as IT and pharmaceuticals, have scarce local exposure when compared to the options available internationally.
Those wanting to invest offshore can choose to do so either (i) directly through a foreign-domiciled fund by physically moving funds into an offshore bank account and then directly purchasing offshore investments. The other option is to invest (ii) indirectly through a Rand-based offshore investment that invests in a local feeder fund with a mandate to invest in foreign assets. The asset manager, using their foreign exchange capacity, then converts the funds into the required currency and invests in offshore assets on behalf of the investor.
When investing directly offshore, investors are able to use their Single Discretionary Allowance (often referred to as the ‘travel allowance’) and/or their Foreign Investment Allowance for offshore investment purposes, with the SDA limited to R1 million per calendar year and the FIA limited to R10 million. While no tax clearance certificate is required in respect of the R1 million SDA, note that investors will need to obtain a SARS tax clearance certificate in respect of the FIA which remains valid for a period of 12 months from date of issue. On this note, investors should keep in mind that the SDA and FIA allowances are not sequential which means it is not necessary to first exhaust the Single Discretionary Allowance before making use of the Foreign Investment Allowance. In fact, an investor can apply for and use their Foreign Investment Allowance without having accessed any of the Single Discretionary Allowance which is often the case where an investor’s SDA has been earmarked for travel, covering emigration costs, making international purchases, or moving smaller amount offshore when exchange rates are favourable.
Once an investor’s funds have been externalized and invested in an offshore account, withdrawals can generally be paid into any international account in the name of the investor provided the account can accept transfers in the domiciled currency of the investment, bearing in mind that the funds do not need to move back into or through a South African bank account. While almost all South African banks offer the facility to make such transfers, note that there are also a number of companies that specialize in forex transfers. Due to their specialist nature, these companies are able to offer more preferential rates on exchange as well as other value-added services such as enabling the application for tax clearance which is included in their pricing. In addition, more and more asset manager platforms provide for the exchange and transfer of monies to their own offshore platforms provided this transfer is within the investor’s remaining SDA capacity for the year. In such circumstances, the investor would deposit the Rand amount in their local account and the asset manager platform would then complete the exchange and transfer the funds to the offshore platform on the investor’s behalf. A significant advantage of this method is that the fees on these transfers can be significantly more cost-effective due to the asset manager’s bulk purchasing power.
It is important for investors to consider the most appropriate structure for a direct offshore investment, with options including direct shares, discretionary unit trust funds, or an endowment wrapper. Depending on the investor’s tax status and objectives, an endowment wrapper can be a highly useful structure as the taxes are both defined within the wrapper and paid on behalf of the investor to the relevant revenue authorities. In addition, beneficiaries may be nominated on such investments which opens the options for beneficiaries as to how such an inheritance is received, and the tax consequences of such.
When electing to invest indirectly offshore through a Rand-denominated funds, note that no Rands are physically transferred offshore, and the investment remains domiciled in South Africa. As such, the Single Discretionary Allowance and/or Foreign Investment Allowance do not need to be accessed. There is a wide range of available global feeder funds offered by various asset managers who then invest funds abroad on an asset swap basis in various markets determined by each fund’s particular investment mandate. These indirect investments can be implemented relatively efficiently as the investor is making use of the asset manager’s capacity to externalize funds. These feeder funds allow an investor to build offshore exposure into their portfolios while also providing an exchange hedge against a depreciating Rand. Note, however, that withdrawals and disinvestments from such accounts will need to be paid into a South African bank account which is held in the name of the investor.
In closure, an often overlooked but very important matter when it comes to offshore investing is the impact that it has on one’s estate planning and the potential need for a foreign will. When deciding to externalise your funds, be sure to establish whether the administrative platform recognizes your South African will for probate purposes, or whether a foreign will is required. While South Africans enjoy freedom of testation, this is not necessarily the case in other countries, especially those in civil law jurisdictions. Many countries have strict inheritance rules in place that could impact your ability to bequeath your foreign assets as you would like. That said, it is important to be clear on your reason for wanting to invest offshore and to seek professional advice on how best to externalize your funds in the best interests of both your overall financial plan.
Have a fantastic day!
Sue
