Offshore investing fundamentals

Always carefully consider your reasons for investing offshore; ensure it’s not a knee-jerk reaction to local bad news.

Offshore investing has experienced a rapid rise in interest and implementation in the recent past. Arguably, this rise in popularity can be attributed to the poor performance of and the rampant corruption within national government, combined with the stagnation of the South African economy.

Naturally, when local outlooks are negative and bad news abounds, investors tend to look elsewhere for investment opportunities in pastures that appear more fruitful. That said, it is always advisable for investors to carefully consider the reasons for wanting to invest offshore, and to ensure that their decision is not merely a knee-jerk reaction to local bad news.

Some investors seek offshore investment opportunities to improve diversification, provide for future liabilities or to seek alternative market conditions that are not locally available. On the other hand, some investors make an emotional decision to externalise their rands, believing that they will sleep better knowing that their funds are invested offshore.

For the sake of context, it is important to keep in mind that South Africa currently makes up only around 0.4% 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 which affect these businesses.

In circumstances where an investor is likely to incur their expenses in foreign currency, it may make sense for that investor to build an offshore portfolio in the jurisdiction in which they intend to live and spend. Primarily, this would involve hedging against a volatile currency exchange.

Where an investor is contemplating a retirement abroad, a future emigration, or has children who are likely to study abroad, setting up an offshore portfolio in that region would make sound investment sense.

The global offshore investment landscape is vast in comparison with the local South African investment market. Funds can be given exposure to selected regional opportunities in economies which are stable and therefore more certain. Alternatively, they can be directed to emerging economies in pursuit of more potential growth. Also, keep in kind that many large-scale industries, such as information technology, have minimal diverse exposure in South Africa in comparison with the options available internationally.

Once an investor has made the decision to invest offshore, he/she can effectively choose between direct offshore investing or indirect offshore investing. Investing directly offshore involves the physical transfer of one’s rands out of the South African jurisdiction and onto an investment platform listed abroad, with the funds being invested into underlying funds which are domiciled in foreign currency.

Investors are able to achieve this using either or both a combination of their single discretionary allowance (SDA), colloquially known as the ‘travel allowance’, and their foreign investment allowance (FIA). The SDA is limited to R1 million per calendar year and may be used at the investor’s discretion without the need for a tax clearance certificate or other supporting documents. The FIA enables an investor to transfer a further R10 million offshore over and above the SDA, although to do so he/she will need to obtain a tax clearance certificate which, once issued, is valid for a period of 12 months.

It is important to note that the SDA and FIA allowances are not sequential which means that an investor does not need to first exhaust their SDA before making use of their FIA.

The foreign investment allowance can be applied for and used without any of an investor’s single discretionary allowance being accessed, bearing in mind that the SDA is very useful when it comes to travel, covering emigration costs, making international purchases, or moving smaller amounts of money offshore when exchange rates are favourable.

Once an investor’s funds have been externalised 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. The funds do not need to move back into or through a South African account.

There are a number of reputable service providers who can assist investors to move funds abroad.

While almost all banks in South Africa offer the facility to make such transfers, there are also a number of companies that specialise 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 will deposit the rand amount in their local account and the asset manager platform will 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.

The other option for externalising funds offshore is to utilise the indirect option through rand-denominated funds. Indirect offshore investing means that no rands are physically transferred by the investor, and their investments remain domiciled in South Africa. As there is no transfer of funds abroad, the investor will not use any of the SDA nor will they need to apply for a FIA in order to make such an investment.

There are a myriad 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 and allocated relatively quickly and efficiently as the investor is making use of the asset manager’s capacity to externalise 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 if the investor.

Finally, an often overlooked but very important feature of offshore investing is the impact that it has on one’s estate planning and the potential need for a foreign will.

When making a decision to externalise your funds, be sure to establish whether the administrative platform recognises your South African will for probate purposes, or whether a foreign will in that jurisdiction is required.

While South Africa enjoys freedom of testation, this is not necessarily the case in other countries, especially those with civil law jurisdiction. Many countries have strict inheritance rules in place, also known as forced heirship or mandatory succession rights, which could impact on 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 externalise your funds in the best interests of both your investment plan and your estate plan.

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Gareth Collier

Crue Invest (Pty) Ltd


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