Five offshore tax questions
What you pay largely depends on how you invest and the vehicles you use. WHAT YOU NEED TO KNOW
The tax you pay when investing offshore largely depends on how you invest and the vehicles you use.
Allan Gray’s Carla Rossouw answers the following questions: 1. What are common ways of investing offshore through a unit trust? Investing in a rand-denominated offshore fund with an SA fund manager, or directly in an international fund with an international manager or via an offshore platform. A rand-denominated fund is an SA unit trust investing in a fund/funds domiciled offshore (feeder fund or fund-of-fund). For direct offshore investments, you follow a specific process. Over-18s can take R1 million offshore for investment each year without a Sars tax clearance certificate. If it exceeds R1 million, apply for a clearance certificate. If it exceeds R10 million, you need special permission.
2. Rand-denominated offshore unit trust investments: what are the tax implications? Income tax and capital gains tax (CGT) may be payable. An investor pays tax on interest and dividends earned on the investment. Offshore dividends are included in your taxable income and taxed at a 20% effective rate, after accounting for an offshore dividends exemption. All foreign interest is included in your taxable income and taxed at your marginal rate. There’s no tax exemption for foreign interest. With CGT, you’ll pay tax on the full capital gain. 3. What are the tax implications of investing in foreign currency in an offshore unit trust? You’ll be liable for income tax on the offshore interest and dividends, similar to a rand-denominated investment. The dividend income is taxed at 20% and interest is fully taxable at your marginal rate. From an income tax perspective, the tax rules are the same. The difference is tax payable on capital growth – you won’t pay tax on exchange rate movements if you invest directly offshore via a unit trust. If you bought an offshore asset in hard currency, the capital gain/loss is first calculated in foreign currency, then converted to rand using Sars’ average exchange rate, or the exchange rate on the date of sale. As there’s one currency conversion, there’s no tax payable on the exchange rate movement in the investment period. It’s more tax efficient to invest directly in an offshore unit trust in hard currency if the rand weakens, and in a rand-denominated offshore fund if it strengthens. 4. Investing offshore: how do you reduce your tax liability? SA tax residents pay tax on their worldwide income, but Sars allows certain concessions, e.g. dividend income exemption, so you only pay 20% tax on offshore dividends. 5. Estate duty: Are offshore investments and local investments on equal footing? SA tax residents pay 20% estate duty, regardless of where assets are held. Estate duty on worldwide assets includes offshore investments. Jurisdictions like the US or Great Britain levy inheritance tax or estate duty, so when an SA investor dies, his estate could be liable for estate duty in SA and the foreign jurisdiction (double taxation).