PART ONE
Warren Ingram [WI]: Dividends, tax and capital gains tax become a major issue when we are investing overseas. Would it not be better to get global exposure through a feeder fund (also known as an asset swap)?
Hannes Esterhuyse [HE]: When you follow the route of an asset swap, there are two aspects that you need to keep in mind. First, you are not sanitising the geopolitical risk. For example, if you are concerned about the political situation in South Africa then in an asset swap, you are not taking the risk out of the equation because your funds will need to come back into South Africa and be converted into rands. So, although you may benefit from the currency movement in this scenario, you do not escape the geopolitical risk.
The second point relates to how capital gains tax is calculated when you have an asset swap versus hard currency where there is a functional currency involved. The bottom line is that you pay more tax when you do an asset swap as opposed to when you go direct with hard currency offshore.
WI: If you go overseas, how do we decide on where the home for the money is? Which jurisdiction do we choose?
HE: Let’s say on the one hand you have America. Everybody wants to invest there but once you are in that tax net and take all their compliance issues on board, it becomes a challenge. On the other hand, you have places like Afghanistan, where no-one wants to invest. In between these two extremes, we have tax havens and international finance centres. A tax haven is a place where you can hide your money and your income will not be exposed to taxation. This is something that we do not want you to do as a client because we believe in doing things the right way.
International finance centres are places like the Channel Islands. Let’s look at some of the characteristics of these jurisdictions. They are typically tax-neutral. In other words, you will not be paying any more or any less tax in those jurisdictions than you would have paid in South Africa or your tax residency jurisdiction.
They are friendly towards offshore investment. There is a willingness to do business with international investments. Investing in hard currency is the whole purpose of the investment route. There is political stability so rating agencies would rate these jurisdictions well. International finance centres are where you want to go. However, a jurisdiction could be viewed as an international finance centre by one country and not another. So always check what the Financial Action Task Forces stated on it.
WI: We are in a complex global environment of taxes and there is much to focus on and to be aware of.
Barry O’Mahoney [BM]: I am not sure that the product providers are providing the financial planners with enough information about the consequences to a global family.A lot of South Africans are in the South of England, America or Australia and these three jurisdictions are quite tough on receiving money from offshore endowments.
A South African endowment is an offshore endowment to a UK taxpayer, and an endowment that’s in Guernsey or on the Channel Islands is also an offshore endowment to them and when they receive that money, it can often become income taxable in those people’s hands.
Many planners think that they have their affairs organised for their client here, the parents in South Africa, but the consequence for the ultimate beneficiaries, the children, is not well-structured for them so a lot of thought needs to go into this.
In your share portfolios, if you buy shares such as Apple or any of the Magnificent Seven, the minute you get past US$60 000
(R1 083 636 at time of publishing), then on your death that money will get taxed at 40% estate duty in the US because they are US-listed stocks.
Also, for South Africans who have bought properties in the UK or who may have inherited money over there, if the amount is higher than
325 000 pounds, then you must pay a 40% UK estate or inheritance tax.
Speakers
