Investing offshore for the right reasons

While it is possible to grow your personal wealth by trading on the JSE only, investing in foreign markets provides you with a broader set of opportunities.

Offshore investments have become a popular choice for many South African investors over the last number of years as the relaxation of exchange regulations has made international investment more accessible. South Africa represents less than 1% of the world’s economy and not making the most of alternative investment opportunities means investors are missing out on the possibility of growing their wealth abroad.

The main benefit of offshore investing is the diversification it provides. The performance of global economies is not always synchronised. By investing in offshore markets, one can access markets that are performing well when one’s domestic market is lagging.

Other benefits include the fact that, in South Africa, as well as in many other emerging markets, inflation is generally higher than in the major developed markets and, as a result, the value of the rand has tended to weaken against developed market currencies over the long term, boosting returns in rand terms.

Offshore investments can be made through numerous investment vehicles in the various asset classes, such as equities, bonds, property or cash. South African investors have two options when investing offshore. Firstly, one can invest directly offshore. In this case, the investor would have to meet exchange control requirements, convert rands into the offshore currency of choice, and thereafter make the desired investment.

Alternatively, an investor could purchase one of the many offshore products available in South Africa. In this instance, the investment is paid for in rands, and any distribution received, or withdrawal made, would also be paid out in rands. The most common way in which this is done is by investing in a unit trust, which, in turn, uses the offshore allowance of its management company to invest in offshore assets.

In terms of exchange control, South African residents are entitled to two annual allowances when looking to invest directly in foreign markets:

R1 million Discretionary Allowance – this can be used for travel, gifts, study, alimony and foreign investment without having to apply for tax clearance
R10 million Foreign Investment Allowance – requires tax clearance for foreign investment

These allowances run from 1 January to 31 December each year.

Investing should be undertaken with a long-term objective in mind. The diversification benefit of offshore investing is ongoing and is aligned with a long-term investment horizon.

One of the other problems that local investors have when looking to take money offshore, is the tendency to invest in low-yielding, low-risk offshore assets. Investors tend to see this as their “safe money” that will protect them from any economic or political risk in SA. However, research has shown that the strong influence of currency fluctuations in offshore investments impacts returns and magnifies the risk. This has resulted in traditionally safe investments exposing investors to unintended risk.

The tax implications of offshore investing can be complex, and expert advice should be sought. Because South African tax law is residence-based, taxpayers are taxed on income according to where they live, rather than on where the income is earned. Hence, the normal rules of taxation apply to offshore investment in terms of capital gains and revenue gains, with the added requirement that the exchange-rate gain or loss must be included, regardless of whether or not the cash is repatriated. Foreign dividends and interest are also taxed, with the added complexity of foreign withholding taxes, which can usually be set off against the tax due.

As with any investment decision, investors wanting to invest offshore are advised to consult their financial advisor to assist them in making optimal investment decisions, given their individual circumstances and objectives.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.