Why in­vest­ing off­shore di­rectly could save you tax

CityPress - - Business - – Maya Fisher-French

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.

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