As a South African investor, there are a number of ways to gain offshore exposure, namely investing directly in an offshore fund or investing in a feeder fund. Picture: Rawpixel.com.
Ryon Phernambucq
As a South African investor, there are several ways to gain offshore exposure, namely investing directly in an offshore fund or investing in a feeder fund. The investment decision to determine which of these is most appropriate involves some considerations.
Are the two investment routes similar?
The main similarity is that they both provide an investor with offshore exposure to foreign markets.
How do they differ?
The first distinction lies in how offshore markets and funds are accessed:
Direct Offshore Fund:
South African residents over the age of 18 are allowed to remit R1 million per calendar year under the Single Discretionary Allowance and an additional R10 million per calendar year under the foreign investment allowance, known as the Approved International Transfer (AIT), which requires approval from Sars. The AIT PIN is valid for 12 months, and the investor must remain tax compliant to use it. Both allowances can be used to invest in offshore funds, with investments made in foreign currencies such as US dollars or British pounds. Withdrawals can be kept in foreign currency and do not have to be remitted to South Africa.
Feeder Fund:
The investment is made in ZAR, by investing in a local feeder fund that “feeds” into an offshore fund. When an investor requests a withdrawal from the feeder fund, it is paid in ZAR. The investor, therefore, is not required to invest in foreign currency directly, as the “swop“ from ZAR to foreign currency is done within the feeder fund. Since the fund is being accessed locally and the investment is done in ZAR by the investor, it does not use the single discretionary allowance, and no Sars clearance is required for the individual investor.
Further explanations and comparisons between Direct Offshore Funds and Feeder Funds:
| Direct Offshore Funds | Feeder Funds |
| Potentially requires a higher minimum investment amount | Generally requires a lower minimum investment amount. |
| Due to South Africa’s FATF grey listing, enhanced due diligence on South African investors is required by offshore companies, which may result in longer lead times for opening an investment account. | As a South African fund, local investors experience standard onboarding procedures for investment account openings. |
| Investor’s funds are externalised. | Investor’s funds remain in ZAR. |
| Utilises the investor’s own offshore allowances. | Utilises the foreign investment allowance of the management company of the feeder |
| fund. Does not utilise the investor’s foreign allowance. | |
| Rand depreciation is not factored into any capital gain. | Rand depreciation is factored into any capital gain. |
Credit: FSP No 18490 and Analytics Consulting 1 (Pty) Ltd; FSP No 47564
How does the calculation of tax play a part?
The tax treatment between the two differs. For investment directly into offshore funds, currency movements are not considered in the tax calculation over the investment period. Capital Gains Tax (CGT) is calculated on the investment gains at the prevailing exchange rate at the time of sale.
In contrast, feeder funds are priced daily in ZAR, and any foreign currency movements are included in the daily price and, therefore, impact the value of the investment daily, and, consequently, the potential CGT. CGT is calculated on the investment and currency gains or losses at the time of sale.
In conclusion
When deciding the best approach for offshore investment exposure, both direct offshore funds and feeder funds have their advantages, depending on individual needs and preferences.
Potential investors are encouraged to meet with a qualified and independent financial adviser who will be able to consult an investor about gaining offshore exposure while taking into account their personal circumstances.
* Phernambucq is the financial planner at Fiscal Private Client Services.
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