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Top considerations when moving your money offshore

13 April 2021 Erik Olwagen, International Personal Banking, Head: South Africa Distribution at Standard Bank

From the beginning of January to end-February, there has been increased uptake of solutions that facilitate externalising of funds by South African clients. With increased challenges around load shedding and broader opportunities, more people may be thinking about moving money offshore to mitigate risk.

Since the onset of Covid-19, ultra-high-net-worth clients have shifted more funds offshore. Conversely, those who were vulnerable to the impacts of the pandemic, typically the self-employed or entrepreneurs, started to redeem funds back to make ends meet. This meant breaking some of their investments, which is often only allowed in the face of exceptional circumstances.

Whether you are wanting to move funds offshore, or bring them back to South Africa, there are certain practicalities to be aware of.

Different ways of moving money out of South Africa

It is much easier nowadays to move money offshore. There are two routes that South Africans can take here. Route one is to invest into offshore assets through feeder funds. These are essentially South African unit trusts or similar investments that feed into a direct offshore fund. The investment is made in ZAR, which the investment company then converts into foreign currency – also known as an asset swap. However, your investment will always be in ZAR if you redeem it and you cannot leave it in the foreign currency, nor have access to the hard currency.

Route two is taking your money offshore directly using the discretionary or foreign investment allowance. The discretionary allowance allows for individuals to move up to R1 million between the first of January and end of December of any given year. Funds can be moved electronically, either via your Internet Banking platform or Mobile banking app, for example to a Standard Bank Isle of Man Bank account or investment.

There is also a foreign investment allowance, set at R10 million per individual per annum. It’s important to note that South Africans must first obtain a tax clearance from the SA Revenue Service (SARS) before they can use this allowance.

The foreign investment allowance cannot be transferred electronically. Should you wish to use the R10 million foreign investment allowance, you can visit any bank branch with a Bureau de Change, or forex desk, fill out a balance of payments form, and agree to a rate that you are comfortable with. The money can take up to five days to reach the account of choice.

In both the discretionary and foreign investment allowance routes, clients that opt not to open a bank account can send the money directly to some investment institutions. However, it is strongly advisable for those taking this route to set up a bank account offshore just in case you want or need to redeem funds at any point.

When is the right time to move money offshore?

When considering moving funds offshore, it is very difficult to predict where foreign exchange rates are moving to. You should seek financial advice if required prior to making a decision on the currency you wish to invest into and when to move your funds offshore.

Those who are rate sensitive might want to consider drip-feeding funds into hard currency. For example, if you plan to send R10 million out, send it out in tranches and, possibly benefit from pound or dollar cost averaging. This means that if you send your funds over in three or four tranches throughout the year, it is likely that you would have received the best possible rate, on average, without spending hours trying to monitor the forex rates.

In this case, it is important to be aware that there will be some fees charged on top of the currency spread such as swift and commission fees.

Tax implications to consider when externalising funds

Regardless of the way in which you decide to move funds, there will be tax implications. The extent to which you are taxed will depend on the jurisdiction you move your money to. In the Isle of Man, for example, there is no requirement to pay withholdings tax on interest earned in a bank account. So, if you earn 10 pounds interest, you will receive 10 pounds into your Isle of Man account. Whereas in many other jurisdictions, the 10 pounds in interest earned will likely be subject to withholdings tax.

However, even if you do get your full amount of interest, you will still need to declare it locally in South Africa since we operate on a residency tax-based system. This means you are taxed on your worldwide assets. Fortunately, there is a generous interest allowance in the country. In many cases, unless someone earns substantial interest locally, it ends up being free of tax in the year of assessment.

Another point to note is that, in the current low interest environment, investors will earn zero interest in hard currency like dollars and pounds. But of course, that picture can change. As little as three years ago, investors were earning a decent amount of interest in most currencies.

There are also tax implications associated with investing into a product that is regarded as a growth asset, such as a unit trust. On these types of investments you may be liable for Capital Gains Tax and need to seek tax advice prior to making any changes on your portfolio.

If you have an account with WebTrader, Standard Bank’s Offshore trading platform, and you earn dividends on an offshore company, you will be taxed on that pay-out as you would when earning dividends from a SA-based company. You should seek independent tax advice prior to investing and making changes to your portfolio in these markets to ensure you comply and fully understand the tax implications.

The main difference between local and offshore banking is that locally, you cannot have a joint account with your partner or child over 18 whereas it is accepted practice in the offshore jurisdictions. If my wife and I have an offshore account together, and she survived me, the account will remain fully functional and available to her. This is as a result of the survivorship principle that is applied in offshore markets.

However, many individuals often misunderstand that their portion of the money that sits offshore will still form part of their estate calculation for inheritance tax. And to complicate matters further, there are other international laws to be cognisant of such as SITUS and FATCA taxation that will kick in. Those who hold portfolios with direct shares in American companies as example often fail to realise the impact these international taxes will have on their investments at death.

At Standard Bank, we do not provide tax advice and encourage our clients to research the matter with a licensed practitioner to prevent any tax surprises. If a client is engaging us to set up a company or structure for them in an international jurisdiction, we would not proceed any further unless they can show us the proof of legal and tax opinion received.

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