Offshore investing: where, how and how much?

In an exclusive Blue Chip discussion, South Africa’s leading investment professionals focus on offshore investing and why it is important to engage with a financial advisor. Part Two deals with the practicalities of taking money offshore, the exchange rate and the importance of timing.

Two stacks of coins with sprouts ontop symbolizing monetary growth


Andrew Finlayson (AF): In terms of the actual practicalities of taking money overseas, what are the different ways in which a client can physically take money out of the country?

Lara Lotter (LL): The reality is that one is not limited to the amount that can be externalised outside of South Africa. The differences lie in the different requirements for different amounts, and for any level, being able to show the source of the funds.

Single discretionary allowance of R1-million

If you have a green barcoded ID book and a valid tax number, you can remit up to R1-million in a calendar year without having to obtain any clearance from the revenue office. One simply has to report where the money comes from.

Additional investment transfer clearance process

This process, formerly referred to as the foreign investment allowance, governs the amount after your single discretionary allowance (R1-million) up to a maximum of R10-million. The main requirement for this process is simply reporting the source of the funds to SARS (eg is it inheritance proceeds, a unit trust portfolio, a local matured endowment portfolio) with the supporting documentation. There are a few additional requirements such as declaring your global assets and liabilities, a certificate of good standing, and of course, providing your efiling profile so that the submission can take place.

Letter of compliance application process

The letter of compliance application process is for amounts over a total of R11-million (R1-million plus R10-million above). This is a tax clearance which must also go through the South African Reserve Bank, so there are two reporting entities that need to see the source of the funds. And some of the information is more rigorous; for example, if the source of funds is a unit trust portfolio, for the additional investment transfer clearance process (above), you would have to provide statements for three months, whereas for the letter of compliance application process, you would have to provide statements for six months. If you fulfil the regulatory requirements, there are no limits.

AF: Practically, how has that affected your business and people looking to take money overseas?

LL: In April 2023, the foreign investment allowance tax clearance and the IT21(a) tax clearance were merged forming the approval of international transfers (AIT) clearance or tax compliance status (TCS) pin letter and the processes that have changed from our side in terms of submissions and requirements have been very little.

If you are trying to move funds offshore just because you believe that the rand is going to weaken you are really doing it for the wrong reasons.

The one area where additional information requirements by SARS are significant is in reporting that your source of funds is coming from a trust. Then SARS wants to have a more comprehensive understanding of that inter vivos or testamentary trust, who the ultimate beneficial owners are and what your actual share or interest in that trust is. So, the process change itself has been for SARS internally, on how they handle the submissions. Does that mean that it is not going to change? Absolutely not, there will be a change, but at present all the requirements remain the same. There has been talk in the media that SARS is now requesting assets and liabilities, but that has always been the case. SARS is putting a more efficient machine into play to process clearances faster because there is a higher volume of them now than there ever was before when it comes to South African residents looking to send money offshore, diversify portfolios and so on. It’s just simply that they need to process them faster. That, at least, is our take on it.

AF: And I suppose if one looks at what has happened, partly owing to factors such the Reg 28 legislation changing from 30% to 45%, if anything, the move has actually been the opposite way; instead of being more restrictive it has been far more allowing of the flow of capital out of South Africa.

Cobie Legrange (CL): I think what we have seen, quite possibly because of the greylisting that we went through at the beginning of 2023, is a tightening up on the processes rather than a material change to the movement of funds offshore.

AF: A lot of South Africans take money overseas largely as a bet against the rand and aren’t too concerned about the performance of the offshore investment itself. Rather, they rely on the rand’s weakness to give them a rand return. Is this a sensible motive? And if you think it is, how do you manage clients around this issue?

Greg Strachan (GS): I always try to dissuade my clients from making decisions based on trying to benefit from rand devaluation, because I think it is founded on the wrong principles. In an “offshore or not” decision, a key consideration should be determining what portion of your assets need to be held in the currency where your liability is. I can’t stress enough the importance of matching the location of assets and liabilities and this should be the key driver of your clients’ thinking about a move offshore.

There are a couple of misnomers in the media from time to time around what’s permissible, limitations on what an individual can take offshore and so on.

Once your client is clear about where their assets should be sitting, then a sensible decision can be made about taking excess capital offshore. And then once this decision is made, I don’t think it makes sense to put too much store on what the current exchange rate is. If the rate is a bit high, one can send it off strategically, say monthly or every two weeks, rather than trying to “call” the rate.To reiterate, it is very important to get the client to understand fundamentally the inherent risks associated with holding offshore assets, and it is really a case of making the client very aware that having funds offshore that are supporting a lifestyle in South Africa is not the most efficient way to hold assets. Having said that, some clients will still decide to take the risks as a premium against political instability in South Africa.

AF: When your clients are looking to take money overseas how much do you look at the valuation of the asset on the other side versus the currency?

Hannes Viljoen (HV): Our preference is squarely on the valuation of the asset on the other side. I believe if you are trying to move funds offshore just because you believe that the rand is going to weaken you are really doing it for the wrong reasons. It should be about what you believe your offshore asset is going to give you versus what your onshore asset is going to give you. Because the truth is, no-one can know what the future may bring, and how unforeseen events may affect the exchange rate one way or the other. So, we put most of the weight on the expected return rather than on the base of the rand.

Practical measures for timing the exchange rate to a client’s advantage

AF: The exchange rate looms large in many people’s minds and is a significant factor in when and how much they consider taking offshore. But how important should the exchange rate be in the decision, and more specifically, how important is getting the timing right? Is it worth, for example, getting a tax clearance in place, to be able to move quickly when the time is right?

LL: I think it is very important to consider the realities of SARS turnaround times. At present, provided you have your ducks in a row in terms of documentation, etc, that turnaround time is 15 to 21 working days (though they can be shorter). So, if you have a client who is likely to want to move funds soon, it makes sense to have an existing tax clearance certificate in play.There are also other measures available that help with timing for our wealth manager clients, such as rate watch facilities or forward exchange contracts.

AF: Do a lot of your clients put a level at which they want to trade the currency and have that in the market, so the system can then just trade automatically?

LL: Absolutely. Our rate watch facility works slightly differently though. What happens is there is a realistic target range set, we then monitor the rates via the client’s designated dealer and we monitor the markets. Should that rate alert trigger, we contact the client or the designated person (quite often this is the wealth manager) who then may determine whether to proceed. You can also reset the goalposts depending on what the market movement or market volatility is on local currency.
So, again, it is about creating potential hedging strategies on foreign exchange whereas previously clients really haven’t been able to do that and have been at the mercy of whatever the banks’ rate of exchange was.

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