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What are tax implications of an offshore ETF portfolio held in a wrapper?

Policy owners are not responsible for the personal tax administration of the insurance policy.

I have an offshore ETF portfolio held in a “wrapper” with the custodian being a SA registered and regulated brokerage. The constituent ETFs are domiciled in the US and traded on the NYSE. I see that all dividends are subject to 30% withholding tax. I am a SA tax resident. How do I deal with this or does the “wrapper” take care of it internally? The second question is: What is the case if the portfolio is not held in a “wrapper”?

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Financial services companies with life insurance licenses are permitted to offer their clients access to investment portfolios that are “wrapped” around products that life insurers are licensed to design, manage and sell.

Essentially a life insurance product (usually a life insurance policy or an endowment policy) is “wrapped” around the policy owner’s investment portfolio. It is owned and controlled by the insurance company until the benefit or payment is triggered in favour of the policyholder under the policy’s terms. Typically, this could either be the insured event or the policy’s maturity.

A typical insurance wrapper enables a person to purchase a life insurance policy, either on their own life or on someone else’s, by paying a premium (usually but not always a one-off premium). When the insurer pays out the benefit under the terms of the policy, it consists of the original policy’s value and the investment portfolio’s growth (or loss).

Insurance-based wrappers have become very popular in South Africa against the background of taxpayers wishing to arrange their affairs in a tax-efficient manner, a shrinking of the Johannesburg Stock Exchange and a broader range of investment opportunities offshore.

The reader does not specify what type of wrapper policy they have been sold. However, typically wrapped investments seek to offer a wide range of underlying investments (including exchange-traded funds, as per the question) invested across different jurisdictions in the investor’s foreign currency of choice. Some policies allow policyholders to invest in global securities directly through several stockbroking service providers on either a discretionary or execution basis.

In addition to the wide range of underlying holdings and consolidated reporting, endowments and life policies are usually structured to maximise tax efficiency (be it estate duty tax, capital gains tax, dividend tax, tax on interest earned or foreign dividends tax).

If the assets are held within the SA-domiciled insurance policy, local tax rules apply. If the ETF or portfolio of ETFs is “housed” within a life insurance policy in the reader’s case, the insurer is responsible for calculating, collecting, and administering any tax due. Policy owners are not responsible for the personal tax administration of the insurance policy.

These policies are attractive to those investors for whom the tax payable on the policy calculates to less than it would be if the assets were owned in their personal capacity. The terms and conditions of payable taxes, the nomination of beneficiaries, and application of estate duty are generally covered in the policy rules.

Second question

If the portfolio was not held in a locally domiciled life or endowment policy and owned directly by the individual, the individual is responsible for reporting and paying any applicable taxes. It would not be appropriate to address all the scenarios relevant to different investors in this response, as the response would be too long. A good tax advisor would be able to assist with all issues that arise.

General comments

One of the foundational principals of every financial decision is not to make the decision solely for tax purposes. By all means, structure your investments tax efficiently. But ensure the tax/cost-benefit is worth the additional cost and complexity.

You should confirm that the wrapper structure is appropriate for your circumstances. Endowment policies tend to be worthwhile if the policyholder would otherwise be paying the highest marginal tax rate; conversely, taxpayers taxed at lower rates do not benefit to the same extent.

Endowment policies need to be sufficiently funded to breach that level whereafter the tax benefits start to accrue.

We would therefore strongly recommend that a thorough cost/benefit analysis of these products should be undertaken before investing. Ask your financial advisor to calculate all fees, and present them to you both in percentage terms as well as in rands before proceeding.

Like all investment products, wrapper structures are bound by both internal product rules and changing state or national tax laws in either the domicile country or the offshore investment destination. But the rules can change, therefore the risk of change, as well as the potential impact of changes should be factored in.

It is critical that investors get the full benefit of the investment mandates of underlying holdings. Some classes of underlying holdings are significantly more tax-efficient than others in different jurisdictions. It might be possible that similar tax benefits could accrue to investors by investing in simpler structures.

We favour simple, easy to understand investment structures that are tailored to the investor’s needs. To find out more about alternatives to wrapper solutions, please contact Rosebank Wealth Group.

Do you have any questions you would like answered by registered financial planners?

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Bit weird that reader’s withholding tax on US dividends is 30% instead of 15%

This is presumably the SA tax on income in the endowment, not US withholding tax.

The way my (directly held) US works is the US government takes 15% then I include the gross dividend which is then partly exempted, and then try claim the US taxes as a credit here. I say try because it is a bit greek as to how that credit is applied, if at all, and what one’s balance is on carried forward credits. I don’t see such a balance in assessments.

Would be nice article…

Other weird one is 2020 I had foreign capital gain, and out the blue SARS offset a domestic carried forward capital loss. Was a nice surprise but now obviously my provisional tax was way out.

Johan Buys : as far as I know investment income in an SA endowment wrapper is taxed in the endowment at a flat and final rate of 30%, irrespective of its source. It doesn’t come into the personal tax computation at all, nor are any foreign tax credits available to the policyholder.

I’ve never had any issues with claiming foreign taxes on dividends on directly-held securities. Have you tried asking SARS to confirm the available carryforward ?

Cheetah :

I don’t have wrapper but way I understand is they are taxpayer apart from you.

On direct held, I’ve tried both calling and raising dispute, got nowhere. It all goes pear-shaped trying to figure which SA deductions go off what income for determining foreign and local income and then that a foreign tax credit cannot count toward the tax on SA income but nobody is clear whether the SA income or foreign income is first or last for brackets. At some stage I need to get it sorted.

I’d imagine SARS keeps a tab but they just don’t tell you what your carry forward is. I think it only carries forward 7 years.

For 2020 I had local capital gains carry forward loss offset against foreign gain, which again would mess with that definition of local and foreign income.

It’s Greek to me

Johan Buys : It shouldn’t be that complicated, there is no ‘first or last for brackets’, the SA deductions are applied pro rata. There is a worked example in SARS Interpretation Note 18, pages 97-99 (which is a lot easier than trying to read pages 1-96 !)

Agree. South Africa has double taxation agreements with almost 80 countries in total, including the US and Ireland. So eg. the investor will be able to apply for the reduced dividend withholding tax rate of 15 percent for e.g. Vanguard ETFs purchased through one of these centres.

The process is straightforward – generally it is done online. Some US brokerages might require a hard copy of the W8-BEN form to be mailed to them.

On the other hand the situs complications of investing in the US might be avoided by using a wrapper…? In my opinion it is better to simply use a non US domiciled ETF (e.g VUSD instead of VOO) domiciled in Ireland.

MRG : interesting! So would one avoid the estate tax risks by holding out of Ireland? Does that only apply to ETF located in Ireland or to brokerage account in Ireland?

On the 15% not being withheld, I have filled in the W8BEN declarations about not being a US taxpayer every few years and that 15% is always withheld. I think that is just US policy: We withhold on US dividends, you sort out your country with regards tax.

You will avoid the US situs problem (estate duty starts when assets exceed $60k). Yes – you will avoid it by making use of ETFs domiciled in Ireland. It doesn’t matter when the brokerage is located (I use Interactive Brokers).

The 15 percent is definitely withheld. I was saying that it is reduced, that is reduced from the standard 30 percent. But we can’t escape the 15 percent. And then we pay a further five percent to SARS 🙁

Thanks MRG

Stanlib explains some of the foreign dividend scenarios very well. I use this web page as a reference:

Yep – that’s the way I have it. That reader with 30% withholding tax on dividends prob has his wrapper in a place (Mauritius?) that does not have DTA so withholding tax rate is 30% instead of 15%

Interestingly – a long time ago I held an ETF that was basically a high yield bond fund. It’s monthly distributions which were in effect underlying interest got treated as dividends. So basically max tax rate of 20% once one has applied that exemption of 25/45.

End of comments.





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