The questions on many investors’ lips are: where is this all heading, and what will it mean for my long-term investment planning? The daily headlines highlight the many shortcomings of our current national, provincial and local governments, but taking a step back, we can see the consequences of a political agenda that has been in play in South Africa since 1994. The ANC government and its quasi-socialist agenda has now played itself out.
Since 1994, we have seen the introduction of affirmative action, BEE, Capital Gains Tax (with several increases), the residence-based tax system, an increase in Estate Duty, and we will soon see land expropriation without compensation as national policy. The common thread in all of this is the state-led redistribution of wealth. While the ANC government has largely failed to perform on its promises, it has been more effective in its ability to extract more and more from the wealthier South African residents.
Corporate South Africa, under the leadership of some of the world’s most savvy business people, started divesting out of South Africa decades ago. The most obvious examples are to be seen in the mining sector. BHP Billiton has no assets in SA, and Anglo American, which used to comprise 25% of the JSE, now only generates about 15% of its profits in South Africa. The gold mining sector is another prime example. In 1990, there were 60 listed gold miners, compared to the present eight.
The JSE comprises less than 1% of global markets, so managing your wealth with a global perspective is no longer merely an approach to consider, but rather the only sensible option. Globally, the average high-net-worth (HNW) individual invests around 60% of their wealth outside of their country of residence. In South Africa, this is below 10%. If South Africa’s HNW population is to catch up with international averages, or to emulate the actions of corporate SA, there is significant ground to be made up.
The international investment markets include a universe of 119,000 mutual funds, compared to approximately 1,500 local unit trusts. Add to this the complexities of tax reporting, inheritance taxes and cites, and most importantly, whom to trust, and you will be forgiven for procrastinating. For many South Africans, they have acknowledged the value of internationalising their wealth, but the task of identifying the correct investments for their needs has been too daunting. Often, cash in an offshore bank account has been a popular choice for the sake of simplicity and perceived safety.
Creating an international investment portfolio requires careful consideration and, ideally, guidance from a qualified advisor who can direct you into the appropriate structures. For example, estate planning is a critical element when internationalising your assets. In the event of your passing, holding assets that are based in the United States or the UK, as a non-resident, could result in estate duty taxes of up to 40%. This far exceeds the maximum rate of 25% in South Africa. Should your estate need to be administered via a foreign executor, the delays for your beneficiaries can run into years, with fees being levied in Dollars or Sterling. There are, however, many investment structures one can utilise that will limit or mitigate these costs and delays. Offshore products can allow for joint life assureds, while such products as endowments and international pension plans offer favourable tax and estate planning benefits.
Diversifying offshore should certainly form part of your longer-term investment planning. A considered approach that extends beyond the simplest or cheapest options is essential, however, the perceived simplicity of an international bank account, direct share portfolio or mutual funds, can result in a longer-term legacy issue that erodes significant capital for your beneficiaries.