Invest offshore: how tax works
CHOOSE A ‘FEEDER FUND’ OR GO DIRECT Comparison of hard currency and rand-based investment.
There’s been growing interest in offshore investments in the wake of Nenegate. But rand depreciation shouldn’t be the main/only consideration. With the JSE representing roughly 1% of the total international stock market capitalisation, offshore investments provide diversification opportunities and could reduce an investor’s risk, depending on personal circumstances. Broadly speaking, investors have two options when investing offshore: investing in rand in a “feeder fund” (local rand-based unit trust feeding or investing in an offshore fund) with a local asset manager, or going directly offshore and investing in hard currency.
In a feeder fund, the local asset manager would use his own offshore capacity to invest offshore. He’d convert the money into dollars or other foreign currency and invest in offshore funds, Richard Carter of Allan Gray says.
In terms of exchange control regulations, Sarb limits the portion of retail assets local fund managers can invest offshore.
Tax-wise, investing in a feeder fund is a simple arrangement and treated as any other investment in a local unit trust. “You are going to pay similar taxes you would pay on a local investment,” he says.
Generally, asset managers don’t require higher minimum investments for feeder funds than for their domestic unit trusts. For people with small amounts to invest, it’s a convenient way of getting offshore exposure.
A downside is local asset managers can run out of foreign capacity and may not be able to take new money offshore. “These products can occasionally be closed to further new investments as is the case currently for some local asset managers.”
Alternatively investors can bypass local managers, change local currency into dollars, pounds or euros and invest directly with an offshore manager – often with the help of an investment platform represented locally.
Carter says while the approval process used to be quite burdensome, we can now invest R1 million each year without getting tax clearance. Note, this is a broad offshore allowance, which also covers items like expenditure on credit cards, travel expenditure and even local expenditure with foreign companies (eg Uber rides).
For investments over R1 million, South Africans must get a tax clearance certificate from Sars. The minimum investment amount required would generally also be higher, Carter adds. When investing directly with an offshore manager, the capital gains on disposal would be declared in foreign currency.
When the rand depreciates it’s more tax efficient to be invested directly offshore, but when the local currency strengthens, it’s better to be invested through a local vehicle.
“You should think about why you are investing offshore and which one of these two scenarios you are more concerned about,” Carter says.