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”?
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.
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.
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.