South African investors are looking beyond South Africa’s borders. Having a healthy offshore allocation in an investment portfolio is not only essential for managing domestic risk but can also generate handsome rewards through exposure to international markets and investment opportunities that are not available in South Africa.
Investors pursuing an international diversification strategy can generally achieve better risk/return characteristics and can access first-world markets for long-term growth and potentially superior returns. Offshore investments in hard currency also act as a hedge against the falling rand, which has depreciated against the US dollar by over 50% in the last five years alone.
Offshore investments further provide a solid platform for any South Africans who are or may be considering emigration, whilst offering far greater flexibility and efficiency for estate or succession planning purposes.
Currently, South African individuals can take up to ZAR11 million (c. USD600,000) per taxpayer per year offshore. This is a combination of the annual single discretionary allowance (SDA) of R1 million, and the annual foreign investment allowance (FIA) of ZAR10 million (or ZAR20 million per family unit). It’s important to note that these allowances are only active for a calendar year: they expire on 31 December and any remaining amounts cannot be carried over to the next year.
“Allowances are used by South African residents – or South African citizens living abroad who have not yet financially emigrated – to move funds offshore. Typically, these individuals will be accumulating funds through salaries, bonuses or dividends, and holding funds offshore in hard currency greatly assists their financial mobility,” says Leah Mannie, Business Development Manager at Sovereign Trust (SA).
To send amounts above ZAR1 million via the FIA will require the investor to obtain a Tax Clearance Certificate from the South African Revenue Service but, once cleared, these allowances can then be utilised for various offshore investments, such as overseas property, investment portfolios, ETFs and other equities.
“With the current levels of uncertainty in South Africa, building wealth within our borders can become restrictive. Financial planning is integral when making decisions and having offshore exposure as well as structures in place can help plan for the present and for the future; whether your ultimate decision is to leave South Africa or not,” says Mannie.
“Using your allowances wisely, can dramatically increase the opportunities available for your investments, as 100% of these funds can be diversified in global funds and listed shares, with the required levels of asset protection, growth and consolidation that you get from going offshore.”
Should an individual decide to financially emigrate at some point, ensuring that their offshore financial affairs are properly structured, will be helpful when planning and taking their next step. It is important to remember that to access your South African retirement and pension arrangements and transfer same overseas when you have tax emigrated, you will need to prove that you are no longer a tax resident for three consecutive years and your funds will be locked in until the application is approved.
“Once you’ve decided to invest offshore, you should be obtaining investment advice from a financial advisor who has the necessary expertise regarding offshore investments for South Africans,” says Mannie.
It is also imperative to seek reputable and well-regulated offshore jurisdictions when considering investments. You can visit the website of the Financial Action Task Force to identify those jurisdictions that are ‘whitelisted’ for anti-money laundering purposes. Using jurisdictions that are ‘grey’ or ‘black’ listed by the FATF can expose investors to additional levels of compliance and may limit their banking options. The European Union also largely bases its own list of ‘high-risk countries’ on the FATF list.
“Creating offshore exposure is different for every person because there will always be a variation in risk appetite and goals. But the key is that offshore investment creates diversification to mitigate overall risk, as it offers exponentially more options in legacy planning and choice of investment vehicles,” she said.