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Why offshore investments are not always offshore

Reader’s questions answered.

CAPE TOWN In this advice column Nic Horn from Citadel and Bianca Botes from Peregrine FX answer a question from a reader who has money an in international fund via an asset swap arrangement.

Q: A couple of years ago my wife inherited from her parents. Part of the inheritance was an investment in a fund via an asset swap arrangement with the bank.

We now want to release these funds for our own use overseas and we’ve been told the investment must first be repatriated. However, my question is whether it is only the original investment that must be repatriated or is it the original investment plus the profits from that investment?

The term asset swap is quite loosely used these days. In this case however it seems to imply that these funds are not held directly offshore by the investor. In other words there was no tax clearance or discretionary allowance used to take money out of South Africa.

An asset swap is used by fund managers in collective investment schemes or unit trusts to invest all or a portion of funds within their unit trusts offshore. It acts as an alternative to a direct offshore investment permitted under exchange control regulations.

Therefore this is technically not an offshore investment but a rand investment with underlying offshore exposure. This means that the proceeds will be paid out in rands in their entirety. The return will however be a combination of actual offshore performance and the exchange rate at any given point in time.

Asset swaps generally have lower investment minimums, are less onerous in terms of regulation and paperwork, and allow for monthly contributions. However, institutions charge an ongoing fee for the asset swap which dilutes the return. Therefore there is an extra layer of fees.

The reader seems to want to use the money offshore. I am not sure of the quantum involved but the investors can simply take the full proceeds of the current investment in rands and then send these offshore immediately using their available allowances.

Each South African resident taxpayer is entitled to take R1 million offshore a year as a discretionary allowance, and a further R10 million per annum directly offshore subject to a tax clearance. A greater sum can be allowed if a special application is made to the South African Revenue Services (Sars) and the South African Reserve Bank (Sarb). Such investments “live” offshore and the proceeds can be paid either into an offshore account or repatriated back to SA.

Some financial services can assist with an end-to-end solution whereby a tax clearance certificate is obtained on the investor’s behalf and the funds are transferred to the offshore investment account at a highly competitive exchange rate, and at no additional cost to the client.

Investing directly is generally cheaper, more flexible, more transparent and it allows investors to truly globalise their assets.

Nic Horn is a director and regional head of Citadel in KwaZulu-Natal, and Bianca Botes is a new business development partner at Peregrine FX.

If you have any questions you would like answered by financial planning experts, please send them to editor@moneyweb.co.za.

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The individual can also apply directly to the SARB to externalize the funds without remitting them back to SA – technically the funds would be remitted to SA and booked out immediately, which would just incur costs on the exchange. A direct externalization is possible, but requires some leg work with the SARB.

would these externalised funds still be subject to taxation in SA if the person has not officially immigrated ?

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