Why investing offshore directly could save you tax
When it comes to offshore investing, you can either invest in a local rand denominated fund, which invests in offshore assets, or you can use your foreign investment allowance to transfer money offshore and invest in a foreign currency denominated fund.
If you invest in a rand denominated fund and decide to sell your investment, you’ll receive your money back in rands. With an offshore fund, your money stays in the foreign currency and can remain abroad.
For investors who invest monthly, or want a low minimum-investment fund, rand denominated funds are often more accessible. However, if the rand depreciates, you will pay more capital gains tax.
At the recent Allan Gray Investment Summit, Richard Carter, head of product development at Allan Gray, explained that, when capital gains are calculated on a direct offshore fund, the rand depreciation is not included because it only takes the growth of the investment in the foreign currency into account.
However, if you sold your investment in a rand denominated fund, the full value of the capital gain would include rand depreciation.
For example, if someone invests R100 in an offshore fund and the rand is trading at R/$10, the investment is worth $10. The price per unit of the funds is $1.
After a few years, the price per unit of the fund doubles to $2 and the investment has grown to $20. During this period, the rand has depreciated to R/$20. In terms of a rand-denominated fund, the value of the investment increased from R100 to R400, representing a capital gain of R300.
For a direct offshore investment, the capital gain is calculated at $10. For tax purposes, the capital gain would be $10 multiplied by the current exchange rate (R/$20) – in other words, the taxman would only deem a capital gain of R200.
Tax benefits, however, should not be the reason for selecting an investment. You need to consider other issues first, such as cost, convenience and your overall investment strategy.