When is an offshore investment not an offshore investment? Various solutions offer various degrees of international exposure – and it pays to know the difference.
There’s no question as to the benefits of investing offshore. By expanding your exposure to global markets, you’ll enjoy more global opportunities, greater diversification and more protection against local currency devaluation. As Carrick Senior Specialist Paul de Waal explains, “It’s general consensus in many First World countries that you hold at least 40% of your wealth outside of the country in which you live. It’s a very good risk diversification tool for investors in First World countries, and we generally tend to think that we should be following that sense of investment thinking.”
But when you invest offshore, are you really investing offshore? It’s a strange question, but one that more and more investors now have to ask.
Having a truly offshore investment means you enjoy the diversification, protection, growth, tax efficiency and foreign currency stability you’re looking for; as opposed to an investment that may look and smell like it’s offshore, such as an asset swap or feeder fund, where you are still exposed to South African political risk.
In the case of a feeder fund, you’re looking at indirect offshore investment in a rand-denominated fund that has the mandate to invest in foreign assets. The fund is priced in rands, you invest in rands, the fund manager then converts those rands in into foreign currency, and when you disinvest, your returns are converted back into rands and paid into your rand-denominated local bank account. What people don’t realise is that there is still a direct link to South Africa and the Reserve Bank can, at any time, call for those funds to come back to South Africa.
There are certain advantages to this kind of investment strategy. For example, there’s no maximum investment limit and you don’t have to obtain a tax clearance certificate. But you aren’t really investing offshore, are you?
In a truly offshore investment structure, your investment is housed in a safe, politically stable and highly regulated jurisdiction, and your rands are converted into that country’s currency (be it dollars, euros, pounds, etc). Yes, there are limitations. South African taxpayers require a SARS tax clearance certificate, and are allowed to invest a single discretionary allowance (SDA) of R1 million – plus a foreign capital investment allowance (FCIA) of R10 million – per calendar year. Many such direct offshore investments have higher minimum investment limits; and many do not facilitate debit orders, meaning that you’ll need a minimum lump sum upfront.
The steps in the process are not insurmountable, however – especially not if you have the advice and assistance of trusted, qualified and experienced wealth specialists. First, they’ll help you apply for a tax clearance certificate in respect of that foreign investment allowance. If your tax affairs are in order, this process typically takes anywhere from 2-8 weeks. Once your tax clearance is confirmed, the next step is to set up a bank account in the destination country, and to transfer funds into that account. You will then be free to invest your funds in that country as you see fit.
This is where an advisory service is so valuable. Where do you want your money to go? How much do you want to invest, and for how long? How will that affect the value of your money? Who do you use to do the foreign currency exchange to ensure you get the best rates? These are questions that qualified, experienced wealth specialists can help you answer, structuring a long-term investment strategy that will maximise growth and protect your investment from unnecessary risks.
Carrick Wealth is a leading specialist in providing exactly that kind of advice, guiding you to make tax-efficient offshore investments in foreign hard currency for mid- to long-term investments.