The information contained in this document should not be seen as tax or financial advice which Investec cannot provide. Tax rules will vary depending on your personal circumstances and are subject to change. We recommend that you seek independent advice before making an investment.
With the relaxation of exchange control regulations in recent years, it has become much easier for South African investors to invest their funds offshore. Key reasons for considering investing offshore include protection against the weak rand, political volatility in South Africa, as well as diversifying risk. Find out more in Paul Hutchinson’s article, Why invest offshore?
When advising your clients, it is important to understand the different types of offshore investments and their tax implications to ensure that your clients make informed decisions. We examine how South African tax residents can gain offshore exposure through various investment vehicles and highlight some important factors to consider.
How much can investors invest offshore?
Currently, an individual over the age of 18 may invest a total amount of R11 million offshore per calendar year. This consists of a R10 million foreign capital allowance and a further R1 million discretionary allowance.
No tax clearance is required when investing the R1 million discretionary allowance, but investors need to obtain tax clearance from the South African Revenue Service (SARS) to utilise the R10 million foreign capital allowance. Tax clearance certificates are valid for a period of 12 months from the date of issue. Investors who wish to invest amounts exceeding R11 million, must obtain special approval from the South African Reserve Bank.
Please note that local trusts do not qualify for the foreign capital and discretionary allowances.
How can investors obtain offshore exposure?
Investors may choose to invest in rand-denominated unit trust funds (South African funds with offshore exposure or international feeder funds). Alternatively, they may prefer to invest directly in assets offshore by utilising the annual allowances explained above. Find out more in Paul Hutchinson’s article, How to go about investing offshore.
Investing in rand-denominated funds
These are South African unit trust funds that invest in other funds/assets that are located in another country. South African multi-asset or balanced funds may typically invest up to 30% in global assets, whereas an international feeder fund provides full exposure to its underlying offshore fund. The South African funds typically have lower minimum investment levels than direct offshore funds. Furthermore, investors are not required to utilise their foreign allowance, as the funds are based in South Africa. This means that local trusts and minors will also be able to obtain offshore exposure through these funds.
Investors should be aware that investment proceeds will be paid out in rands in South Africa, regardless of the prevailing exchange control regime or the political environment at the time.
Paul Hutchinson’s article, Yo-yoing base effects of the rand, examines the impact that the exchange rate has on the global investment returns of local investors. Sangeeth Sewnath also looks at the currency effect and the importance of diversification in his article, Consider your portfolio holistically.
Investing directly offshore
When investors choose to invest directly offshore, their funds are transferred from South Africa through the exchange control process. Investors have the option of investing via an investment platform, such as Investec Investment Management Services (IMS), or directly into offshore funds or shares. Paul Hutchinson’s article, Same, same but different, examines capital gains tax and other key differences between rand-denominated feeder funds and foreign-domiciled international funds.
Offshore trusts have also been used by South African investors to gain offshore exposure while at the same time benefiting from asset protection.
Using an investment platform to invest offshore
Investing in offshore funds via IMS, gives investors offshore exposure while enjoying the convenience of dealing with a South African investment platform. IMS offers two products that afford investors the opportunity to invest in offshore funds. The GlobalSelect Access product (a sinking fund policy) is available through the Guernsey life branch of Investec Assurance Limited (IAL). GlobalSelect Access investors don’t have to report or pay tax to SARS. IAL takes care of all tax administration by undertaking the calculation and payment of any tax due. This is possible because a sinking fund is taxed in terms of the five funds approach, which means the policyholder fund is the taxpayer and not the end investor. Investors with high marginal tax rates will also benefit from the lower tax rates applied within the policy (for income as well as capital gains).
Alternatively, investors who do not wish to invest via the Guernsey life branch, can invest in the GlobalSelect Investment Portfolio, thereby making use of the nominee company structure of IMS. Investors still have direct offshore exposure, but their assets are held in the name of the local nominee company. Although the investor is responsible for reporting and paying tax to SARS, IMS provides the investor with the relevant tax certificates.
Using offshore providers to invest directly into offshore funds and shares
Investors should note that they will be responsible for all tax administration in respect of such investments. There may also be offshore probate and inheritance tax implications, in addition to estate duty in South Africa, which we explain in more detail below.
Investing via an offshore trust
Making use of an offshore trust can be advantageous in certain circumstances. The benefits may include avoiding the need for offshore probate, protection against creditors and estate planning benefits. Investors should be aware, however, that offshore trusts can be expensive to administer. Also, there may be additional unexpected tax consequences for a South African donor and beneficiaries. It is therefore important to obtain advice from a tax practitioner before setting up an offshore trust or transferring funds to an existing offshore trust.
What are the tax implications for investors when investing offshore?
The general rule is that South African tax residents are taxed on their worldwide income in South Africa, regardless of the source. This is referred to as the residency basis of taxation. There are two tests to determine whether someone is a South African tax resident:
- Were you ordinarily resident (in other words, do you consider South Africa your true home to which you return)?
- If you are not ‘ordinarily resident’ in South Africa, you may still be regarded as a South African tax resident, if you were physically present in South Africa for a period exceeding 91 days during the last year and each of the previous five years of assessment, and more than 915 days in total during the preceding five years of assessment.
Investors may also be liable for tax in the jurisdiction where the offshore investment is domiciled. However, where South Africa has a double taxation agreement with the relevant country, it may be possible to avoid double taxation.
Factors such as the type of product, underlying assets, tax legislation applicable in the relevant jurisdiction, double taxation agreements and possible tax credits, may all play a role in determining the total tax liability for investors invested offshore. Investors should note that in certain countries a withholding tax is levied on interest and dividends. In these cases, the income received by the offshore fund will be after-tax income, although additional tax implications may still arise in South Africa.
Paul Hutchinson’s article, Same, same but different, examines capital gains tax and other key differences between rand-denominated feeder funds and foreign-domiciled international funds.
Will foreign inheritance taxes be payable on death of the investor?
The deceased estate of a South African resident is subject to estate duty in South Africa on the worldwide dutiable property of the deceased.
The South African deceased estate may, however, also be liable for foreign inheritance taxes on offshore assets, depending on whether the applicable foreign jurisdiction levies inheritance tax on assets located in that country. South Africa has entered into double taxation agreements in respect of estate duty with several countries to mitigate the effect of possible double taxation.
With regard to GlobalSelect Access, no foreign inheritance tax will be payable on death of a South African resident investor. The investor is not the owner of the underlying assets but owns a policy issued by IAL acting through its Guernsey branch. Currently, no inheritance tax is payable in Guernsey. However, South African estate duty may be payable by the deceased estate of the South African resident investor.
In respect of GlobalSelect Investment Portfolio, South African estate duty and foreign inheritance tax on the foreign assets may be payable, depending on the legislation in the applicable jurisdiction, as well as the type of underlying investment. For example, no foreign inheritance tax will generally be applicable to direct investments in unit trusts where the investor is domiciled outside the relevant jurisdiction.
What about offshore probate?
Offshore probate refers to the process whereby a foreign agent is appointed to wind up foreign assets by way of a grant of probate issued by the foreign court that has jurisdiction over the matter. The South African will of the deceased is sealed by the Master of the High Court and sent to the agent in the foreign jurisdiction, along with a death certificate of the deceased.
The South African estate can only be finalised once the grant of probate is received from the foreign jurisdiction. This could result in significant delays, as well as additional costs for the South African estate.
In respect of the GlobalSelect Access product, provided the investor nominated a beneficiary on the policy who is able to receive the benefit, no offshore probate will be required as the nominated beneficiary will receive the benefit directly.
With regard to the GlobalSelect Investment Portfolio, offshore probate should not be required because the local nominee company is the registered holder of the offshore assets.
Probate may be required in respect of investments directly into shares or offshore funds, depending on the specific jurisdiction.
The importance of advice
From the above it is clear that offshore investments can be quite complex, especially when considering tax implications which depend on various factors as explained above. We therefore recommend that investors obtain expert tax and estate planning advice in the relevant jurisdiction where the foreign assets are held.