International investment exposure is non-negotiable from the point of view of portfolio diversification.
However, according to Mike Wilmot, head of investments at Nedbank Private Wealth: “International investment objectives based on unreasonable tax outcomes, opaque asset ownership or speculative short-term currency views have no place in any sensible process. It is therefore crucial to consider the impact any international investments may have on your will, your tax and estate liabilities, tax administration, and compliance with exchange control and other legislation.”
There are various ways to get international exposure, including:
- Assets you buy and sell in South Africa where there is indirect (companies with offshore earnings) or direct (via feeder funds) international gearing.
- Using institutional foreign investment allowances (commonly referred to as “asset swap” mechanisms) where rand amounts are externalised to buy international assets offshore, but the proceeds must be returned to South Africa in rand.
- Using your annual foreign capital and travel allowances to permanently externalise rands and invest in international assets in another currency.
- Special application to the South African Reserve Bank to obtain permission to permanently externalise additional amounts.
International asset ownership can be structured in your own name or jointly (in certain circumstances) in entities such as companies and trusts; within insurance wrappers such as endowments; and within South African retirement vehicles such as retirement and living annuities.
Wilmot points out that with this decision, “you need to compare each option and combination of options and assess this against what is most suitable for your needs, and the costs and benefits of your choices”.
Some of the factors to compare include:
- Continuity: The extent to which material events such as liquidation or death can disrupt the continued management of or access to your assets.
- Orderly distribution after death: The estate consequences and formalities such as the possible freezing of assets and illiquidity timeframes as well as related costs required to wind up your estate.
- Protection for dependants: This includes financial protection for minors or those with disabilities, planning for the education of descendants, or intergenerational wealth transfer.
- Protecting assets from seizure: The ownership structure will affect legal ownership and each vehicle will provide varying combinations of protection from, say, sovereign (government) and creditor risk while introducing different counterparty risks, such as life company credit risk and regulatory risks.
- Tax cost and administration implications: The applicable tax rates and associated tax risks, as well as the tax administration consequences that stem from how your assets are owned.
- Flexibility: At the outset, ensure your assets are owned in a way that allows for changes in your circumstances, regulations and best practice over time.
And then there are tax considerations. South Africans must declare their global income and capital gains for tax purposes. South African residents are taxed on a residence-based system of taxation when investing internationally. This means that no matter where your assets are situated or how they were acquired, you will be taxed on – and obliged to declare – your global income (including any capital gains).