Financial planning considerations when investing offshore

South Africa is considered a small emerging market in global terms, with the local stock market accounting for approximately 0.40% of the total global equity market capitalisation. This relatively small footprint underscores the importance of geographical diversification for local investors.

All transfers of funds abroad originating from South Africa are subject to exchange control regulations administered by the Financial Surveillance Department of the South African Reserve Bank (SARB). While these regulations aim to manage capital flows, they also provide permissible avenues for individuals and companies to transfer funds abroad.

Allowances available to South African investors

Single discretionary allowance (SDA)

South African resident individuals over the age of 18 are granted an annual single discretionary allowance of R1 million per calendar year by the SARB, which can be used to externalise funds for any legal purpose and does not require foreign tax clearance from Sars. Children under the age of 18 are granted an annual allowance of R200 000 each.

Individual foreign capital allowance (FCA)

In addition to the SDA, South African resident individuals can access a foreign capital allowance of up to R10 million per calendar year. The FCA requires foreign tax clearance from SARS, which is valid for 12 months.

Special approval applications

If, in the same calendar year, you wish to externalise an amount greater than what is permitted using your annual allowances, you can apply to the SARB for approval to do so. The special approval remains valid for one year, and an extension may be used if required.

An authorised foreign exchange intermediary will be able to assist with this process. However, before you apply, it is important to understand the following points:

You cannot have more than one of the above externalisation processes in progress simultaneously.

To gain approval, you must be tax compliant. Sars will assess all entities linked to you as part of their tax compliance approval process.

The exchange rate used for any transfer will depend on the time at which the funds are transferred.

If you are liquidating an asset to externalise funds, capital gains tax may be applicable on the sale of that asset.

Key considerations when investing offshore

When investing offshore, it is critical to look beyond just the transfer of funds. Several other factors that can significantly impact the success and suitability of your investment strategy are outlined below.

Investment vehicle

Offshore investments can take many forms, including unit trusts, endowments, and direct stock portfolios. When considering these options, carefully assess whether the product structure aligns with your financial goals over the short, medium, and long term. Be aware of the access limitations, potential tax implications, and any estate planning benefits or drawbacks associated with your chosen investment vehicle.

Underlying investment strategy

Understanding the specific assets you’re investing in is vital. Take into account the expected return, risk profile, and potential volatility of the investment to ensure it is aligned with your personal risk tolerance and goals.

Estate planning

The nature and jurisdiction of your offshore assets may have an impact on your estate planning needs. In some cases, a separate will may be required to ensure efficient estate administration and to avoid delays or unintended errors in executing your final wishes.

Intention to emigrate

If you plan to emigrate and will cease tax residency in South Africa, you should disclose this to your financial adviser, as such a change may influence the structuring and long-term strategy of your investment plan.

Tax implications

South Africa operates on a residency-based tax system, which means that residents are generally taxed on their worldwide income, regardless of where it is earned. For this reason, it is important to understand how your offshore investments will be taxed, both during the investment period and at the point of withdrawal or death.

Setting your course for global growth

Offshore investing offers South Africans a valuable way to diversify their portfolios and access global opportunities. However, it requires careful planning within the legal and tax framework. Partnering with a qualified financial adviser and a reputable foreign exchange intermediary can help you navigate this complex landscape and make informed decisions that are aligned with your financial goals.

* Laubscher is the advice and product specialist at PSG Wealth.

PERSONAL FINANCE