I currently live in South Africa, and I have no intentions to emigrate. However, I would like to invest in an offshore account, and after years take it out. For example, because I’m 19, I would like to invest in an offshore account in the US, then when I’m 28 I will take it out. Is this possible? If it’s possible, how can I do it and will it be effectively beneficial to me? If not, are there alternate ways?
Thanks for your question. In short, yes you can, but the vehicle you choose to invest in will affect your options and have a differing impact with regard to applicable taxes.
Two of the most common vehicles through which to gain offshore investment exposure are an equity account or mutual fund. Both are relatively liquid, and funds can be withdrawn as pleased within normal transactional timelines.
A foreign equity account or mutual fund can be set up in two different ways. Foreign currency can be purchased and invested directly abroad, or you can make use of an asset swap facility. In the latter case, the underlying investment is located abroad while the investment is reported in rand value and can be withdrawn only in South Africa.
The following should be taken into consideration when a decision is made to acquire foreign exposure, either directly or through an asset swap:
Direct offshore investments
The following points apply to direct offshore investments:
- They serve as a hedge for investors against exchange rate fluctuations.
- The investment value is reported in the foreign currency and can be withdrawn from abroad.
- There is a degree of red tape involved in making the investment, especially if the amount invested will exceed R1 million per annum.
- In the case of unit trust investments and share portfolios, capital gains and the resulting capital gains tax are far lower on a foreign direct investment than they are for an asset swap investment should the rand weaken against the foreign currency. This is because no tax is payable on profits earned due to the strengthening of the foreign currency against the rand. In either case, no tax is payable in respect of a strengthening of the foreign currency.
- There is a risk that situs (40% inheritance tax) may be payable abroad where investments have been made in shares registered in the US or the UK via a direct share portfolio.
Asset swap investments
The following points apply to asset swap investments:
- They serve as a hedge for investors against exchange rate risk.
- It is easy and simple to make the investment.
- The investment is reported in rand value and must always be paid back into a South African bank account, also in rand value.
- In the case of unit trust investments and share portfolios, capital gains and the resulting capital gains tax are much higher if the rand weakens against the foreign currency in which the underlying investment is made. This is because tax is payable on the gain in the overseas currency.
Thank you for your question and for providing clarity as to why you wish to invest offshore. It is important that the decision to invest offshore is not taken as a knee-jerk response to local bad news, so knowing your long-term intention to remain in South Africa is certainly helpful.
Offshore investing is a great way of diversifying your investments across international markets and economies so as to create a distribution of risk and volatility in your portfolio that is less concentrated than a purely South African allocation.
Where an investor is likely to incur expenses in foreign currency, it would make sense for them to build an offshore portfolio in the jurisdiction in which they plan to live and spend. However, you have noted your intention to remain in this country and to use the funds locally. An option therefore may be for you to consider externalising your funds offshore through rand-denominated funds often referred to as indirect offshore investing.
Indirect offshore investing means that no rands are physically transferred by the investor, and their investments remain domiciled in South Africa. There are several global feeder funds offered by various local asset managers who will then invest your funds abroad on an asset swap basis according to the fund’s investment mandate. These indirect investments can be implemented and allocated relatively quickly and efficiently as you will be making use of the asset manager’s capacity to externalise funds.
These feeder funds allow you to build offshore exposure into your portfolio while also providing an exchange hedge against currency fluctuations. Any withdrawals and/or disinvestments from such accounts will need to be paid into a South African bank account.
As there is no direct transfer of funds abroad, you will not need to use your Single Discretionary Allowance (SDA) or Foreign Investment Allowance (FIA).
On the other hand, if you intend to use the funds in a foreign jurisdiction – such as if you intend to work or study abroad, you may want to consider investing directly offshore using foreign-domiciled investments. This involves the physical transfer of one’s rands out of the South African jurisdiction, exchanged into foreign currency, such as the US dollar, and onto an investment platform listed abroad. Once on the foreign platform, your investment may be allocated to the global funds listed and available on such a platform.
To do this, you would need to use either or a combination of your SDA and your FIA, depending on how much you intend to invest. Your SDA is limited to R1 million per calendar year and may be used at your discretion without the need for a tax clearance certificate or other supporting documents. Your FIA allows you to transfer a further R10 million offshore over and above your SDA, although to do this you will need to obtain a tax clearance certificate which, once issued, is valid for a period of 12 months.
Once you have invested directly offshore, withdrawals can generally be paid into an international account in your name provided the account can accept transfers in the domiciled currency of your investment. The funds do not need to move back into or through a South African account unless you so choose.
Depending on the amount you wish to invest keep in mind that offshore platforms have minimum contributions required to establish an account. If these minimums are more than your available funds then the option to use the locally based feeder funds may serve your objective to specifically have offshore exposure. It is, however, important to do your research in respect of investment fees and to select a strategy that is appropriate for your timeline.
It is also important to understand the tax implications of investing through such a structure, together with the consequences that withdrawing or disinvesting will have on your overall financial plan.
Ideally, such an investment should be viewed holistically as part of your overall financial plan to ensure that it is fully aligned with your goals and objectives.