Beware of the tax traps
Consider exchange control regulations and tax implications in foreign jurisdictions
Offshore exposure is vital in any balanced investment portfolio due to the diversification benefits, writes Pedro van Gaalen.
“When developing an offshore investing plan, local investors should prioritise understanding exchange control regulations, tax implications in foreign jurisdictions and the global economic landscape,” says Hein Klee, head of international at Nedbank Private Wealth.
Abigail Kitshoff, business development manager at Glacier International, adds: “Investors must also select the correct solutions, with the best tax outcomes to realise their objectives.”
Regarding tax efficiency, Kitshoff explains investors can optimise offshore investing by understanding the different investment vehicles and solutions available to access global markets.
“Local investors can invest offshore in rand through a local solution that accesses offshore assets using an asset swap, known as a feeder fund, or they can invest directly in foreign currency through an offshore solution by obtaining tax clearance from the South African Revenue Service.”
Once investors complete the tax clearance process, direct offshore investments offer numerous benefits, including access to a broader investment universe.
“Tax is also paid on foreign currency gains and not rand gains, and investors can
withdraw funds to an offshore bank account in their name,” says Kitshoff.
In contrast, returns made via feeder funds are paid in rands into a South African bank account and attract capital gains tax (CGT) on rand gains.
“This could result in a situation where an investment has not grown, but you could pay CGT of up to 18% on gains made due to a depreciating rand,” she says.
“Ultimately, making any investment decision — whether local or offshore — requires skill, knowledge and experience, especially around all of the technical aspects regarding the tax implications,” she says.
Says Klee: “By leveraging globally integrated expert advice, specialist insights and expertise from wealth management advisory firms, investors can make informed decisions about when to externalise assets, considering factors such as exchange rate timing, global market valuations, and their individual risk profiles.”