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Get offshore exposure tax-free

Investors may be missing out on opportunities with their tax-free savings accounts.
The number of international ETFs on the JSE has grown significantly in the last few years, giving investors a wide range of choices. Image: Shutterstock

Tax free savings accounts (TFSAs) were introduced in South Africa in 2015. In just four years they have become an integral part of a multitude of investment strategies.

Many astute financial advisors see them as a useful part of a retirement savings plan. There are two primary reasons for this.

The first is that not only is all growth in these accounts tax-free, but so are any future withdrawals. This means that in retirement an investor can balance their income requirements between their annuities and their TFSA to reduce their income tax liability.

By actively managing where an investor is receiving their income from, a good financial planner can keep them in a lower tax bracket.

Secondly, investments in TFSAs do not face the same restrictions as those in retirement savings products like retirement annuities (RAs). They do not have to be Regulation 28 compliant.

This means investors can be 100% in equities in their tax-free accounts, and also have 100% offshore exposure. Many advisors see this as an effective and efficient way of mitigating the restrictions of Regulation 28, which limits investors to 75% in equities and 30% in international markets (with an additional 5% in the rest of Africa outside of South Africa).

This is a solution for investors who want more growth assets in their portfolios and to diversify away from local country-specific risks, but find Regulation 28 too inhibiting. They can use a TFSA to increase their exposure to both, while still enjoying tax-free growth on their investments.

The mismatch

Unfortunately, many South Africans don’t seem to have realised that this is either possible or desirable. The majority of tax-free savings accounts are held at banks, and in cash deposits.

While this might be the most accessible way for people to get TFSAs, it is far from the most effective. In fact, nobody using a TFSA for a cash deposit at a bank would have seen any benefit at all from it yet.

A previous analysis by Moneyweb showed that because South Africans already get a tax exemption on interest earned, the tax savings on a cash deposit in a TFSA will be zero for at least the first six years of the investment.

Read: Why you may not be gaining anything from a tax-free account at a bank

There are also many investors who don’t realise the full scope of the options available to them in TFSAs – in particular that they can invest across many asset classes, and that they are not limited to South African markets.

Global equity

Investors wanting pure global equity exposure have two broad options. The first would be to set up a tax-free account with a stockbroker, an online broker, or a platform such as etfSA.co.za, and to invest into any of the number of JSE-listed exchange-traded funds (ETFs) that track international indices.

The benefits of this approach would be that it is low cost, and efficient. The number of international ETFs on the JSE has also grown significantly in the last few years, giving investors a wide range of choices, as shown in the list below.

International ETFs available for tax-free accounts
Fund Index tracked Exposure
Cloud Atlas AMI Big50 ex-SA Cloud Atlas AMI Big50 ex-SA Africa outside of SA equity
Cloud Atlas AMI Real Estate ex-SA Cloud Atlas AMI Real Estate ex-SA Africa outside of SA listed property
Ashburton Global 1200 S&P Global 1200 Global equity
CoreShares Global DivTrax S&P Global Dividend Aristocrats Blend Developed market dividend equity
CoreShares S&P Global Property S&P Global Property 40 Global listed property
CoreShares S&P 500 S&P 500 US equity
Satrix MSCI Emerging Markets MSCI Emerging Markets Investable Markets Emerging market equity
Satrix MSCI World Equity Feeder MSCI World Developed market equity
Satrix Nasdaq 100 Nasdaq 100 US technology equity
Satrix S&P 500 S&P 500 US equity
Stanlib Global Reit Index Feeder FTSE EPRA/NAREIT Global Reit Index Global listed property
Stanlib MSCI World Index Feeder MSCI World Developed market equity
Stanlib S&P 500 Index Feeder S&P 500 US equity
Stanlib S&P 500 Info Tech Feeder S&P 500 Info Tech US technology equity
Sygnia Itrix 4th Industrial Revolution Global Equity Kensho New Economies Composite Global emerging technologies equity
Sygnia Itrix EURO STOXX 50 EURO STOXX 50 European equity
Sygnia Itrix FTSE 100 FTSE 100 UK equity
Sygnia Itrix Global Property S&P Global Property 40 Global listed property
Sygnia Itrix MSCI Japan MSCI Japan Japanese equity
Sygnia Itrix MSCI USA MSCI USA US equity
Sygnia Itrix S&P 500 S&P 500 US equity

The alternative is to invest through global equity unit trusts that local asset managers have made available as tax-free investments. These can be accessed either through tax-free savings plans such as those offered by Allan Gray or Glacier, or directly from the asset managers themselves. Many index funds offered by the same providers as the ETFs above are also available in unit trust form.

For example, Allan Gray offers the following options:

Global equity unit trusts available through the Allan Gray investment platform
Fund Exposure
Investec Global Franchise Feeder Fund Global equity
Nedgroup Investments Global Equity Feeder Fund Global equity
Old Mutual Global Equity Fund Global equity
Satrix MSCI World Equity Index Feeder Fund Developed market equity


Other funds available directly from asset managers themselves or on different platforms include the Coronation Global Opportunities Equity [ZAR] Feeder Fund, the Stanlib Global Equity Feeder Fund, and the Prescient Global Equity Feeder Fund. This is by no means an exhaustive list, but it illustrates that investors have a range of options.

Worldwide flexible funds

For those investors who may want a little more risk protection than they could get through a pure equity fund, there are also unit trusts in the worldwide multi-asset flexible category that are available tax free. These funds ordinarily invest primarily in international equities, but they can also invest in South Africa, and in other assets such as cash and bonds.

They give the asset manager free rein to invest in whatever regions and whichever assets they believe are offering the best opportunities. As with global equity funds, these will be available through tax-free plans, or directly from the asset managers themselves.

Allan Gray offers the following options:

Worldwide flexible unit trusts available through the Allan Gray investment platform
Fund Exposure
Coronation Market Plus Fund Unrestricted
Foord Flexible Fund of Funds Unrestricted
Investec Worldwide Flexible Fund Unrestricted

Again, this is not meant to be a complete list, but it does provide some examples of what is available.

While the limits on contributions to tax-free savings accounts of R33 000 per year and R500 000 over a lifetime may seem small, they do offer investors a genuine alternative to traditional retirement savings vehicles. Using them intelligently can make a big difference to their eventual outcomes, particularly because they are far less restricted in terms of where they can invest.

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COMMENTS   18

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Not entirely true. I have been paying tax on my foreign dividends inside my tax free account. Rediculous, but true.

Is it South African tax your have been paying? I only pay foreign taxes on my SYG World.

Agree with the author, but would make it stronger… ANY PROVIDER of a tax-free bank account is a SHYSTER and is duping the public. They should make clear that the biggest benefit to a client is when they can benefit from saving the majority of taxes, i.e. (SA) Dividend withholding tax, tax on interest income and CGT. Bank accounts only offer the saving if interest income and you forego the other two. Pure mis-selling!!

But I disagree with the author on one point: I think there are better ways to hold 100% foreign equity (you lose the SA Dividend withholding tax benefit, and the SA interest benefit), so again you’re only benefiting from 1 of the 3 taxes possible.

It ultimately depends where your foreign dividends come from and what rate that country deducts as a witholding tax from your divs. You still have to include foreign dividends in your taxable income, and then deduct the foreign rebate (which is the witholding tax that was deducted on the foreign dividend.) Having it parked in your TFSA account, brings no concerns for further tax. And of course the big advantage compared to Retirement Funds, no capital gains on withdrawal

So will I pay the 15% tax to the US for foreign shares or not?
Compared to SA shares where I would pay 0?
To me it makes more sense to buy local high yield like property, preference or maybe SA shares and then leave the offshore exposure by utilizing the offshore allowance and go direct..

Retirement Funds do not have capital gains tax on withdrawal, they have other taxes, but not CGT.

Thanks Grego for comment on preparing the tax return.

If tax is deducted at foreign source on foreign dividends and foreign interest then it is paid and SARS could not be expected to “refund” this to a SA tax payer.

Not quite so clear (though not unreasonable) that the SA taxpayer should then pay more??? Is there a practice note or legislation on this?

100% correct Henry (unfortunately)

Off topic, I note your three nine’s (999) in your Username you got inadvertently UPSIDE DOWN. Maybe see if it can be fixed?

God’s blessings to you sir 😉

Hi Michael,
No the 999’s really are 666’s

Have a fabulous day.

@Henry6x6 Gelandewagen 😉

Yes, I know…mark of the beast. (My own Afrikaans direct translation it would be “merk van die bielie” *lol*)

What an honour to chat to the devil himself 😉 But said in a positive midset, when I say “devil”…it also can mean a good thing:

e.g. “under my car’s bonnet is a devil of an engine”. It means it will go extremely well 😉

So your login name implies “Henry goes like the clappers of hell” Like it? 🙂 Thanks for providing some fun.

Two things:

I’m in agreement with commentators that said certain offshore funds within a TFSA do attract tax on foreign dividends (what about foreign interest or CGT gains?) and will still be taxed within the TFSA product.

It’s only SA source dividends (and interest/CGT/REIT) that’s exempt within TFSA as far as I know.
(Interestingly, does anyone has a global REIT fund in one of their TFSA’s?…i.e. to confirm the tax position. My TFSA is still too young to tell, but one underlying-fund in Easy Equities TFSA is a Sygnia Global Property fund.

Second matter: if you’re invested in a TFSA (or any SA domiciled fund for that matter), I’m pretty certain you’re STILL going to be subject to future “prescribed assets” within those funds!

Unless if the fund is direct offshore, i.e. foreign domiciled fund, you will escape any poison coming from SA govt (like in Guernsey, Jersey, Isle of Man, …Mauritius 😉

Coreshares Global Prop recently “repatriated” to SA from Mauritius. Probably means, less tax if inside the TFSA?

“CoreShares Global Prop has decided to “repatriate” the Mauritian CoreShares ETFs and to obtain a primary listing on the JSE (“Repatriation”). The Repatriation also results in certain cost efficiencies being realised and accordingly the management fee will be reduced.”

I honestly believe that the industry should look into the practice of having “Fund of Funds” funds especially in the South African context. Most moderate funds have similar exposures and do not necessarily give the client the diversity in his / her portfolio that was implied / expected and they are generally more expensive than single funds. I believe the practice of using them is lazy and does not constitute actual advice.

Can one move funds from a TFSA cash deposit to a TFSA Share account without any penalties.

Very easily. Use the TFI transfer facility which every provider has to offer

Good article and comments.

For those criticizing using tax free accounts for cash or fixed deposit investments.

Some have more than utilised their tax free allowance of R23800 or R34500 age dependent.

Some have a too high equity allocation and do not want more of their portfolio in what today are elevated valuations. Those individuals can get right now 8.00% + nominal in tax free locked up for 12 months. Easy peazy to switch to equity after that.

Horses for courses.

Any comments?

The tax free amounts are so small that it’s a waste of time.

Morning Patrick, from your article yesterday it states:

“A previous analysis by Moneyweb showed that because South Africans already get a tax exemption on interest earned, the tax savings on a cash deposit in a TFSA will be zero for at least the first six years of the investment.”

Could you please provide me with more info to the above. Many thanks

End of comments.

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