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Offshore investments tie in perfectly with Section 12J investments

11 January 2021 Jonty Sacks, Partner at Jaltech
Jonty Sacks, Partner at Jaltech

Jonty Sacks, Partner at Jaltech

It has become a common statement by financial advisors that they would prefer their clients pay tax and invest the proceeds offshore rather than have their clients invest in tax deductible investments such as RAs and Section 12J investments.

While this may make sense for clients who pay very little tax in South Africa, for other clients, they are missing an opportunity to bulk up their balance sheets. Clients following an “offshore only” strategy are investing their post-tax income off 55% of their gross income, as 45% has been paid over to SARS. If however, a client adopts a “combination strategy” of first investing their capital into a Section 12J investment, and then investing the tax refund of 45% of the investment amount offshore, the client may have less offshore exposure but their balance sheet would have grown by 45% through the tax refund alone.

The below table illustrates this point:

Indicators

Offshore only

Combination strategy

Tax paid within a financial year 

R1 000 000

R1 000 000

Free cashflow

R1 000 000

R1 000 000

Section 12J investment

Zero

R1 000 000

Tax refund 

Zero

R450 000

 

 

 

Local investment amount

Zero

R1 000 000

Amount available to invest offshore

R1 000 000

R450 000

Balance sheet

R1 000 000

R1 450 000

 

Since the offshore only strategy starts off with 31% less capital (R1m compared to R1.45m) than the combination strategy, it must significantly over-perform to catch up to the combination strategy.

If one performs a market comparison, an offshore investment strategy would have needed to return 16.5% per annum (after fees and taxes) to catch up to and match Infinity Anchor Fund’s (a Section 12J investment) recent performance.

If one ignores the returns generated by a Section 12J investment, the tax saving of 45% for a high-income earner investing in a Section 12J investment equates to an annual return of 8.3% (net of all taxes). So, if an offshore investment yields less than 8.3% per year, the client would have been better off investing in a Section 12J investment which offers zero growth.

Although Section 12J investments offer numerous benefits to taxpayers and the country, it is always advisable to have a clear understanding of the past performance of the investment, percentage of capital invested in underlying investments, how the performance fees are charged and what are the exit mechanisms to return capital to investors.

The illustrations above assumes the amount invested is from income which would have been taxed at the 45% tax rate and Infinity Anchor Fund is an authorised financial service provider – FSP number 48981 and VCC No. 0102.

 

Quick Polls

QUESTION

How to give affordable and appropriate financial advice to the low income market segment. There is little room on a R50 pm policy for advisers to be remunerated for the time it would it would take to educate & fulfil admin function. What is the solution?

ANSWER

[a] Eliminate non-advice sales / telesales
[b] Implement industry standards for non-advice information
[c] Introduce an insurer-funded pro-bono advice network to low income earners
[d] Reinforce the Policyholder Protection Rules
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