The tax implications of investing offshore – Moneyweb.co.za

This Article Was Originally From This Site

There has been growing interest in offshore investments in the wake of Nenegate due to political uncertainty and concern about currency movements.

But rand depreciation should not be the primary or only consideration when investing offshore. With the JSE representing roughly 1% of the total international stock market capitalisation, offshore investments provide diversification opportunities and could reduce an investor’s risk, depending on personal circumstances.

The options

Broadly speaking, investors have two options when investing offshore. They could invest in rand in a “feeder fund” (a local rand-based unit trust that feeds or invests in an offshore fund) with a local asset manager or could go directly offshore and invest in hard currency.

In a feeder fund, the local asset manager would use his own offshore capacity to invest offshore. The manager would convert the money (rand) into dollars or other foreign currency and invest in offshore funds, Richard Carter, head of product development at Allan Gray, explains.

In terms of exchange control regulations, the South African Reserve Bank limits the portion of retail assets local fund managers can invest offshore.

From a tax perspective, investing in a feeder fund is a simple arrangement and is treated as any other investment in a local unit trust. “You are going to pay similar taxes you would pay on a local investment,” he says.

Generally speaking, asset managers don’t require higher minimum investments for feeder funds than for their domestic unit trusts. For people with small amounts of money to invest, it is a convenient way of getting offshore exposure.

One downside is that local asset managers can run out of foreign capacity and may not be able to take new money offshore, Carter says. “These products can occasionally be closed to further new investments as is the case currently for some local asset managers.”

The alternative is for investors to bypass local managers, to change local currency into dollars, pounds or euros and to invest directly with an offshore manager often with the help of an investment platform represented locally.

Carter says while the approval process used to be quite cumbersome, South Africans can now invest R1 million each year without getting tax clearance. They merely have to remember that this is a broad offshore allowance, which also covers items like expenditure on credit cards, travel expenditure and even local expenditure with foreign companies (such as Uber rides).

For investments in excess of R1 million, South Africans need to obtain a tax clearance certificate from the South African Revenue Service (Sars).

The minimum investment amount required would generally also be higher, Carter adds.

The tax implications

When investing directly with an offshore manager, the capital gains on disposal would be declared in foreign currency.

“You actually don’t pay tax on the rand depreciation of your capital amount, which is a good thing – there is some inflation protection here – whereas when you invest in a local unit trust [a feeder fund]… that part of your investment return that comes from depreciation is fully taxed and this can make quite a big difference over time,” Carter says.

In other words, when the rand depreciates it is more tax efficient to be invested directly offshore, but when the local currency strengthens, it is better to be invested through a local vehicle.

The below example sets out the difference:

Source: Allan Gray

Let’s assume a South African investor took R100 and invested it offshore some years ago. At the time, the rand/dollar exchange rate was a fictitious R10/$ and one investment unit cost $1. Effectively, the investor therefore invested $10 at R10 to the dollar and paid R100 for ten units.

Several years later, the underlying investment had increased from $1 to $2 per unit (ten units would now be worth $20), but the exchange rate had weakened from R10 to R20 to the dollar.

If the investor had invested through a South African unit trust company, she would have invested R100 and sold at R400 (10 units x $2 x R20) and paid tax on the capital gain of R300 (R400-R100).

If she invested directly with an offshore manager, she would have invested $10 (R100/R10/$) and sold the investment at $20 (ten units x $2). In this scenario, the gain would be $10 ($20-$10) and the tax would only be levied on the rand equivalent of the dollar gain, which would be R200 ($10 x R20) and not R300 as in the feeder fund scenario. In this scenario, the portion of the gain derived from rand depreciation would not be taxed.

What difference would this have made?

Source: Allan Gray

As an example, Carter says if someone invested R10 in their offshore equity feeder fund ten years ago, the money would have grown to R35, which is an annualised pre-tax return of 13.2%.

In the rand-denominated (feeder fund scenario) the capital gains tax drag would have reduced the return to about R30 (11.7%) whereas a direct offshore investment in the underlying fund would have yielded about R32 (12.3%).

This is because in the feeder fund scenario, the investor would also have paid tax on the capital gain due to the depreciation of the rand, Carter explains.

“You should think about why you are investing offshore and which one of these two scenarios you are more concerned about.”

‘ );
jQuery(“.ginput_container input”).click(function(){
jQuery(“.gform_wrapper”).addClass(“active”);
jQuery(“#gform_expand”).addClass(“inactive”);
});
jQuery(“#gform_expand”).click(function(){
jQuery(“.gform_wrapper”).addClass(“active”);
jQuery(“#gform_expand”).addClass(“inactive”);
});

});
jQuery(document).on(‘click’, ‘a[href*=”#to-comments”]’, function(event){
event.preventDefault();

jQuery(‘html, body’).animate({
scrollTop: jQuery( jQuery.attr(this, ‘href’) ).offset().top
}, 500);
});
jQuery(document).ready(function() {
/*
The following handles lightbox expansions of images in the article
*/
//var lightbox_path=lightbox_path||””;!function(a){a.fn.lightBox=function(b){function d(){return e(this,c),!1}function e(c,d){a(“embed, object, select”).css({visibility:”hidden”}),f(),b.imageArray.length=0,b.activeImage=0;var h,e=!1;if(b.grouping&&(h=c.getAttribute(“rel”))&&(e=d,d=[],e.each(function(a,b){h==b.getAttribute(“rel”)&&d.push(b)})),1==d.length){if(“gallery”==b.captionPosition)var i=jQuery(c).parent().next().html();else var i=c.getAttribute(“title”);b.imageArray.push(new Array(c.getAttribute(“href”),i))}else for(var j=0;j1){if(d[j-1].getAttribute(“href”)==d[j].getAttribute(“href”)||jQuery(d[j-1]).parent().parent().children().children().attr(“href”)!=jQuery(d[j]).parent().parent().children().children().attr(“href”)){var i=jQuery(d[j]).parent().next().html();b.imageArray.push(new Array(jQuery(d[j]).parent().parent().children().children().attr(“href”),i))}}else{var i=jQuery(d[j]).parent().next().html();b.imageArray.push(new Array(jQuery(d[j]).parent().parent().children().children().attr(“href”),i))}for(;b.imageArray[b.activeImage][0]!=c.getAttribute(“href”);)b.activeImage++;b.grouping&&e&&(d=e,e=!1),g()}function f(){a(“body”).append(‘

‘),a(“#jquery-overlay”).css({backgroundColor:b.overlayBgColor,opacity:b.overlayOpacity}).fadeIn(),h(),a(“#jquery-overlay,#jquery-lightbox”).click(function(){q()}),a(“#lightbox-loading-link,#lightbox-secNav-btnClose”).click(function(){return q(),!1}),a(window).resize(function(){h()})}function g(){a(“#lightbox-loading”).show(),b.fixedNavigation?a(“#lightbox-image,#lightbox-container-image-data-box,#lightbox-image-details-currentNumber”).hide():a(“#lightbox-image,#lightbox-nav,#lightbox-nav-btnPrev,#lightbox-nav-btnNext,#lightbox-container-image-data-box,#lightbox-image-details-currentNumber”).hide();var c=new Image;c.onload=function(){a(“#lightbox-image”).attr(“src”,b.imageArray[b.activeImage][0]),i(c.width,c.height),c.onload=function(){}},c.src=b.imageArray[b.activeImage][0]}function h(){var c=r();a(“#jquery-overlay”).css({width:c[0],height:c[1]});var d=s();a(“#jquery-lightbox”).css({top:d[1]+(b.shrinkToFit?b.shrinkPadding:c[3]/10),left:d[0]})}function i(c,d){var e=a(“#lightbox-container-image-box”).width(),f=a(“#lightbox-container-image-box”).height();if(b.shrinkToFit){var g=r(),h=c/d;d>.9*g[3]-2*b.shrinkPadding&&(d=.9*g[3]-2*b.shrinkPadding,c=d*h),c>g[0]-2*b.shrinkPadding&&(c=g[0]-2*b.shrinkPadding,d=c/h)}var i=c+2*b.containerBorderSize,k=d+2*b.containerBorderSize,l=e-i,m=f-k;a(“#lightbox-container-image-box”).animate({width:i,height:k},b.containerResizeSpeed,function(){j()}),0==l&&0==m&&t(a.browser.msie?250:100),a(“#lightbox-container-image-data-box”).css({width:c}),a(“#lightbox-nav-btnPrev,#lightbox-nav-btnNext”).css({height:d+2*b.containerBorderSize})}function j(){a(“#lightbox-loading”).hide(),a(“#lightbox-image”).fadeIn(function(){k(),l()}),p()}function k(){a(“#lightbox-container-image-data-box”).slideDown(“fast”),a(“#lightbox-image-details-caption”).hide(),b.imageArray[b.activeImage][1]&&a(“#lightbox-image-details-caption”).html(b.imageArray[b.activeImage][1]).show(),b.imageArray.length>1&&a(“#lightbox-image-details-currentNumber”).html(b.txtImage+” “+(b.activeImage+1)+” “+b.txtOf+” “+b.imageArray.length).show()}function l(){a(“#lightbox-nav”).show(),a(“#lightbox-nav-btnPrev,#lightbox-nav-btnNext”).css({background:”none”}),0!=b.activeImage&&(b.fixedNavigation?a(“#lightbox-nav-btnPrev”).css({background:”url(“+b.imageBtnPrev+”) left 50% no-repeat”,”margin-left”:”0px”}).unbind().bind(“click”,function(){return b.activeImage=b.activeImage-1,g(),!1}):a(“#lightbox-nav-btnPrev”).unbind().hover(function(){a(this).css({background:”url(“+b.imageBtnPrev+”) left 50% no-repeat”,”margin-left”:”0px”})},function(){a(this).css({background:”url(“+b.imageBtnPrev+”) left 50% no-repeat”,”margin-left”:”0px”})}).show().bind(“click”,function(){return b.activeImage=b.activeImage-1,g(),!1})),b.activeImage!=b.imageArray.length-1&&(b.fixedNavigation?a(“#lightbox-nav-btnNext”).css({background:”url(“+b.imageBtnNext+”) right 50% no-repeat”,”margin-right”:”0px”}).unbind().bind(“click”,function(){return b.activeImage=b.activeImage+1,g(),!1}):a(“#lightbox-nav-btnNext”).unbind().hover(function(){a(this).css({background:”url(“+b.imageBtnNext+”) right 50% no-repeat”,”margin-right”:”0px”})},function(){a(this).css({background:”url(“+b.imageBtnNext+”) right 50% no-repeat”,”margin-right”:”0px”})}).show().bind(“click”,function(){return b.activeImage=b.activeImage+1,g(),!1})),m()}function m(){a(document).keydown(function(a){o(a)})}function n(){a(document).unbind()}function o(a){null==a?(keycode=event.keyCode,escapeKey=27):(keycode=a.keyCode,escapeKey=a.DOM_VK_ESCAPE),key=String.fromCharCode(keycode).toLowerCase(),key!=b.keyToClose&&”x”!=key&&keycode!=escapeKey||q(),key!=b.keyToPrev&&37!=keycode||0!=b.activeImage&&(b.activeImage=b.activeImage-1,g(),n()),key!=b.keyToNext&&39!=keycode||b.activeImage!=b.imageArray.length-1&&(b.activeImage=b.activeImage+1,g(),n())}function p(){b.imageArray.length-1>b.activeImage&&(objNext=new Image,objNext.src=b.imageArray[b.activeImage+1][0]),b.activeImage>0&&(objPrev=new Image,objPrev.src=b.imageArray[b.activeImage-1][0])}function q(){a(“#jquery-lightbox”).remove(),a(“#jquery-overlay”).fadeOut(function(){a(“#jquery-overlay”).remove()}),a(“embed, object, select”).css({visibility:”visible”})}function r(){var a,b;window.innerHeight&&window.scrollMaxY?(a=window.innerWidth+window.scrollMaxX,b=window.innerHeight+window.scrollMaxY):document.body.scrollHeight>document.body.offsetHeight?(a=document.body.scrollWidth,b=document.body.scrollHeight):(a=document.body.offsetWidth,b=document.body.offsetHeight);var c,d;return self.innerHeight?(c=document.documentElement.clientWidth?document.documentElement.clientWidth:self.innerWidth,d=self.innerHeight):document.documentElement&&document.documentElement.clientHeight?(c=document.documentElement.clientWidth,d=document.documentElement.clientHeight):document.body&&(c=document.body.clientWidth,d=document.body.clientHeight),b

This Article Was Originally From *This Site*