Tips for moving assets abroad

There are several factors you need to consider when deciding to invest in foreign instruments.

By Schalk Louw

The coronavirus pandemic spooked many investors – both locally and globally – as the erratic swings in world equity indices, and even South Africa’s bond market, can attest. Local fears were enhanced by SA’s sluggish economic performance and rightly prompted investors to question whether or not they should shift their money offshore.

In this follow-up to my previous column on offshore investment (4 June issue), I continue to look at reasons why an investor would opt to move their investments out of the country, and the important considerations that need to be kept in mind before doing so.

Foreign against rand-denominated funds

You can invest offshore either by buying and using foreign currency, or by using rand.

If you opt for foreign currency, you will be limited to your annual offshore investment allowance (which includes monetary gifts, travel, maintenance, study and donations to missionaries), and minimum investments may be of considerable size. Your money, however, will be truly offshore, enabling you to invest in whatever you like in any country you want. Your dividends are also paid in the currency of your choice, which you can leave offshore for as long as you choose. When opting for a rand-denominated foreign investment, you can invest rand in products offered by a local financial services company, which, in turn, invests the money on your behalf in foreign investment opportunities. Your capital and your returns are paid in rand in SA. You can invest any amount you like and any amount the product provider is prepared to accept. Minimum investment amounts tend to be much less than investing directly offshore in foreign currency, therefore making it more accessible to investors, and you are not bound by an annual offshore allowance.

It is advisable to consult your financial adviser or tax specialist prior to investing offshore, especially in terms of the tax implications of such an investment.

Which product should I choose?

You have an abundance of choices, from offshore unit trust funds, to exchange-traded funds (ETFs), to direct shares. Although general equity funds will suffice for most investors, I will always recommend that you seek expert advice before choosing your offshore products. You should also keep in mind the estate planning considerations before you start – since the way you choose to invest could impact your estate. Experts employ dedicated research teams that thoroughly analyse offshore companies and funds and base their choices on fundamental factors such as historical performance, balance sheets, current economic influences and prospects.

Tax implications

When investing in a rand-denominated investment, tax is relatively uncomplicated as you are taxed in the same way as you would be taxed on a local investment. That means that you will pay capital gains tax on the difference between the value of your initial investment and the end value of your investment. The gain will therefore also include any depreciation in the currency. The tax on this will be payable in SA.

When investing in offshore funds or shares, the capital gains will be determined in the foreign currency. The gains are then converted into rand, which means you are not taxed on the devaluation of the currency. Estate duty with direct offshore investments may be more complicated, due to things like situs taxes (inheritance tax in specific offshore jurisdictions) that has the potential to considerably increase the estate duty payable. Again, it is advisable to consult your adviser or tax specialist prior to investing offshore, especially in terms of the tax implications of such an investment.

Be safe

The world is filled with fraudsters just waiting to take advantage of uninformed investors, and countless South Africans have fallen victim to foreign scams in the past. Investors should pay attention to several issues. Firstly, always make sure that you seek advice from a qualified financial adviser, preferably one with a solid background in offshore investing. Second, refrain from investing in unlisted investment companies. Thirdly, avoid products and providers that are not registered with the Financial Sector Conduct Authority (FSCA).

Know who you are dealing with. Never conduct business solely over the phone or through email unless absolutely necessary. And, don’t fall for promises of exceptional returns. If it sounds too good to be true, it most likely is. Lastly, make sure that you know exactly what you are investing in, and avoid complex products.

A compelling case for including offshore investments in your investment portfolio can certainly be made. The benefits, although not discussed in too much detail, are undeniable, if you do your homework properly and remember that an offshore investment should form part of a welldiversified investment portfolio. ■

editorial@finweek.co.za Schalk Louw is a portfolio manager at PSG Wealth.