With all the negative domestic news, it’s not surprising that many South African residents are considering externalising their wealth offshore.
South African investors have, for many decades, employed the strategy of becoming part of the global economy by diversifying their domestic investment portfolios offshore. This strategy includes moving to a currency that is perceived to be less volatile and the purchasing of offshore assets or investments. We take a look at the process of how your hard-earned funds are sent abroad.
Since 1990, the Rand has significantly depreciated against major foreign currencies. In March 1980, the USD/ZAR rate was 0.81 and in 1990, the rate was 2.59. In the first two months of 2020, the exchange rate fluctuated between 14.10 and 15.10.
The flight of SA investor capital to offshore jurisdictions is driven by a lack of confidence in the South African outlook and economy. This negative sentiment is fueled by adverse domestic news, especially on the economic and political fronts. The result is that more South Africans are choosing to place their hard-earned Rands into offshore jurisdictions.
The move into offshore portfolios has become more attractive to investors from all walks of life. Yet, offshore investing can be a daunting task. Financial institutions have, to date, assisted many South African investors to gain offshore exposure.
When considering transferring funds offshore, there are some key factors to consider. Exchange Control Regulations in South Africa govern the flow of cross-border transactions. As a result, there are particular requirements when sending funds abroad.
Two allowances exist for SA residents when sending funds offshore. The first is a Single Discretionary Allowance (SDA). The SDA allows any SA resident over the age of 18 to send up to R1 million offshore per calendar year. No tax clearance is required. The second is a Foreign Investment Allowance (FIA), which enables any SA resident to transfer up to R10 million offshore per year. In order to use your FIA, you will require a Tax Clearance Certificate (TCC) from SARS, which is valid for a period of 12 months. The TCC process is required to ensure that your tax affairs are in order and to prevent money laundering. Collectively, these SDA and FIA allowances give each adult an effective R11 million per calendar year that may be transferred abroad. The investment allowances can be retained offshore indefinitely. SA residents who are under the age of 18 do not qualify for an SDA, but are allowed an offshore travel allowance that does not exceed R200 000 per calendar year.
Sending more than the allowed R11 million per individual is not uncommon, but does require additional Exchange Control approval.
There is an additional requirement that the offshore funds are converted into foreign currency and then transferred into either structured investment products or accounts opened in the client’s own name.
There are two effective methods to invest offshore. These are Asset Swaps and Direct Investments. With an Asset Swap, an investor invests in a Rand-denominated unit trust through an authorised South African financial institution. The Asset Swap capability of the unit trust company is then used to invest the funds offshore. The investment returns are repatriated and paid out in Rands. The same applies if the Asset Swap is liquidated.
Asset Swaps are ideal for investors who want to remain invested in South Africa, but would still also like some exposure to offshore markets. Asset Swaps do not require a TCC and there is no limit on the amount that can be invested.
Direct Investment, on the other hand, is when an investor buys into collective investment schemes (e.g. unit trusts) through a foreign financial institution. The foreign institution then invests the money directly in foreign assets. Direct Investments involve externalising your Rands into a destination investment established in a foreign currency. The key difference is that the investment will be located outside of the jurisdiction of the SA Reserve Bank and all returns will be payable in the foreign currency, thus not requiring repatriation to South Africa before paying out. As discussed earlier, Direct Investments will require Exchange Control approval for values over R11 million per individual.
If you are simply looking to hold foreign currency (without earning any returns), then Foreign Currency Accounts, or offshore bank accounts, should be considered. Foreign Currency Accounts are domiciled locally, but hold balances in one of the major international currencies. Offshore bank accounts, on the other hand, are located in offshore jurisdictions and denominated in the major currencies.
So, the question is: do you want to save money when converting your well-earned Rands into foreign currency? Forex intermediaries are well-positioned to serve their clients in this regard and operate in a regulated space. They have established relationships with banking institutions and have access to preferential pricing for their clients. Partnering with a transparent intermediary can be highly-beneficial when sending funds offshore and the saving can be significant.
Warwick has partnered with Currency Assist as its preferred provider with regard to international money transfers for its clients. Together, we have developed a streamlined process for clients to move funds offshore, including obtaining SARS Tax Clearances and Exchange Control approvals.