Dave Edgar, Associate Director at Personal Trust, explains the various ways in which one can gain offshore investment exposure.
South Africa makes up a very small percentage of World GDP; this together with concerns about the future of South Africa both politically and economically, have recently raised many questions regarding offshore investing. Offshore exposure has always been an important component of a well-diversified portfolio, especially for those living in South Africa, and may possibly become even more important in the future. Mark Huxter, in his article in this issue, discusses the importance of investing offshore and I will discuss the ways in which an individual can gain this exposure.
The two ways South Africans can get direct offshore exposure are by using their Single Discretionary Allowance (SDA) or using their annual Foreign Investment Allowance (FIA).
South African residents over the age of 18 with a bar-coded or ID smart card can avail themselves of the SDA. This allowance is R1 million per calendar year and can be used for investments, gifts, travel, maintenance and overseas studies. The SDA does not require approval from the South African Revenue Service or the South African Reserve Bank and is the simplest way to get direct offshore exposure. If an individual goes over the R1 million allowance in any calendar year, the funds will need to be brought back to South Africa and there possibly could be penalties. It is therefore important to keep a record of how much of this allowance is used for the different purposes, other than investment.
Residents can further avail themselves of R10 million per year using their Foreign Investment Allowance. The FIA requires an application to the South African Revenue Services for a tax clearance certificate. Personal Trust tax clients may ask for this to be done via SARS e-filing. SARS will require your tax affairs to be up to date, three years of assets and liabilities statements, as well as proof of the funds that you would like to apply for. You therefore cannot apply for the R10 million and only have R2 million as proof of funds. Once the FIA has been approved you have one year to utilise this before the application expires.
Both the above allowances can also be utilised by South Africans living temporarily abroad and any funds externalised using these allowances do not need to be repatriated back to South Africa at any stage.
The above-mentioned allowances allow an individual to get direct offshore exposure in hard offshore currency. However, there are other ways to gain exposure to offshore and this can be done indirectly through the offshore exposure that your rand-denominated unit trusts have. The Personal Trust Conservative Managed Fund, Personal Trust Prudent Fund of Funds and Personal Trust Managed Fund all already have approximately 30% invested in offshore assets (30% is the limit that Regulation 28 compliant funds are permitted to invest offshore). Further to this there are a variety of rand-denominated offshore feeder funds that an individual can invest in that are 100% offshore.
Another simple way of increasing your offshore exposure is through your Living Annuity. A Living Annuity does not need to be Regulation 28 compliant and can effectively have 100% exposure to offshore through various feeder funds. Switching funds in your Living Annuity does not attract capital gains tax and can therefore be a cost-effective way of increasing your offshore exposure. For more information on this please see the article by Nick de Villiers entitled ‘Overcoming limitations of the Pension Funds Act on your investment decisions.’
There is a further way to get offshore exposure for local Trusts, as well as individuals who have fully utilised their allowances, and this is by using the asset swap capacity of an asset manager. Asset managers are allowed per SARB to invest a portion of their assets offshore. Personal Trust, depending on capacity, passes some of this allowance onto individuals and Trusts who need additional exposure. It is worth noting that assets taken offshore through our Foreign Direct Investment allowance must remain under Personal Trust’s control. Proceeds from any sales may only be repatriated back to South Africa and cannot be paid to foreign recipients.
As you can see from above there are many ways in which to get offshore exposure. There are also differences in how the capital gains are taxed depending on which route you choose. The best route as well as the percentage is dependent on a specific client’s needs and will best be discussed with your Trust Officer who understands your holistic situation.