Five steps to investing offshore

In this article, first published by Moneyweb, Trevor Lee writes that taking your money offshore is a multi-step, administratively intense process.

In the last month or so, many Rosebank Wealth Group clients have asked us to assist with investing offshore. It is a multi-step, administratively intense process.

Every South African over the age of 18 who is in good standing with the South African Revenue Service (Sars) may take R11 million offshore annually. R1 million of this allowance (called the Single Discretionary Allowance by Sars) may be used for any legal purpose including travelling expenses, sending gifts, paying for overseas education costs or investing offshore. Applying for the Single Discretionary Allowance does not require Sars approval. However, the balance of the foreign investment allowance (FIA), which is R10 million, does require Sars approval.
A qualified and experienced financial advisor would be able to assist you with the whole process described below and will be familiar with the time taken for each leg and the normal range of rates, fees and commissions charged. Crucially financial advisors know which service providers to avoid.

First step: Either you or you with your advisor’s assistance, must complete an application for a ‘Tax Clearance Certificate – Foreign Investment Allowance’. This can either be done by visiting a Sars office or electronically via the Sars website.

If you are in good standing with Sars and your tax affairs are up to date the standard tax clearance turnaround time is around 21 days. However, in our experience, the Sars turn-around time for this application process varies enormously. Some clients have, on occasion, received their tax clearance within days, while others have waited three or four months, even in cases where no additional documents were requested.

The application form requests applicants to supply a range of information to confirm the compliance status of the applicant, as well as the amount of money to be invested offshore, the source of these funds and proof of the stated source of funds.

Sars could request further documentation or supporting documents if you are not up to date with your affairs, if you are currently a politically exposed person, if you were a politically exposed person in the past or if you are married to a politically exposed person, there could be additional information requested.

On approval, Sars will issue you with tax clearance certificate and pin letter, with the Sars logo and specific background watermark (either a paper version or electronic version), which you then present to an authorised foreign exchange dealer. Currently, this certificate includes your tax number and unique certificate number.

However, this system is being phased out and the Sars tax clearance pin letters will soon replace the tax certificates. The pin letter contains a pin code along with your tax number and rand clearance amount to be used by your authorised foreign exchange dealer when sending money offshore.
Tip: Your tax clearance certificate/pin code is valid for a period of 12 months. This means that you can take your time exporting your money as the rand strengthens, taking it out of South Africa in tranches.

Second step: When sending money offshore using the foreign investment allowance this money must be transferred to an offshore bank account in your name or into an investment in your name. It cannot, as an example, be transferred to your spouse’s account. If you do not have an offshore bank account, then one can be opened for you via certain banks in South Africa or an offshore bank. This leg of the process can be tricky. Many offshore banks only open accounts for residents. However, a good financial advisor will be able to guide you through the process.

Third step: The minister of finance, through the Reserve Bank of South Africa has authorised certain banks and Treasury outsourcing companies to act as authorised dealers in foreign exchange. If the foreign exchange dealer or Treasury outsourcing company also provides advice, the firm should also be registered with the Financial Services Conduct Authority (old Financial Services Board).

Authorised dealers and Treasury outsourcing companies may buy and sell foreign currency, subject to certain conditions. Your appointed dealer/outsourcing company may only send money offshore on your behalf if he/she is in possession of the tax clearance certificate issued by Sars.
Foreign exchange dealers compete with one another and have different fee structures and commissions. We have noticed a disturbing trend whereby certain banks and financial advisors add an administrative fee and an exorbitant spread to the exchange rate when exchanging currencies on a client’s behalf. For the record, RWG adds neither an administrative fee nor commission in a foreign exchange transaction. Always make sure you fully understand and are comfortable with fees, charges and commissions before you agree to any transaction.

Tip: Think of taking advice on which currency you want to change your rands to. The ‘rule of thumb’ answer was always that investors should choose the currency of the intended long term investment; that is, if your investment is going to be in a British pound investment, you should opt for British pounds. Likewise, if the investment’s currency base is US dollars, it would make sense to go straight into US dollars. However, in these times of volatility, it is possible that your money might sit in cash for a while, in which case other issues (such as currency strength/weakness over a 12 month period) may become relevant.

Fourth step: The most important decision is what to invest in once your assets are out of the country. The Financial Sector Conduct Authority (FSCA) aims to protect South African investors by insisting that only those funds registered and approved by the FSCA may be advertised or marketed in South Africa. However, from the asset manager’s point of view, the process of registering with the FSCA is costly as measured by both time and money, and some of the best asset managers simply do not bother as the South African market is small in international terms.

The implication of this is that if you wish to invest in products not currently registered by the FSCA, you must do the research on different products yourself. It is worth noting that those offshore investments tend to have higher minimum investment amounts; some start in the region of R100 000. Again, an experienced financial advisor will be able to advise you on minimums, and if necessary persuade your chosen offshore asset manager to make an exception on your behalf.

Tip: With both markets and currency as volatile as they are at present, consider investing your money in your chosen investment in tranches, so as to get a range of entry point prices.

Fifth step: You will have to become financially savvy to administer and monitor your offshore investment. We will deal with some of these issues in a follow-up article.

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