How much of your wealth should be invested offshore?

There is no single offshore percentage that is correct for every South African family.

Some people believe that all their money should leave South Africa. Others keep almost everything locally because their expenses are in rands.

Both approaches can create unnecessary risk.

The correct offshore allocation should be based on your complete financial position, not on fear, politics, a recent change in the rand or the performance of one market.

Start with your total wealth, not only your investment portfolio

A wealthy South African may already have most of their financial exposure in South Africa through:

• A privately owned business
• Their home
• Commercial or residential property
• Local income
• Retirement funds
• Cash in South African banks
• Shares in South African companies

Consider a person with R20 million invested in a business and property and another R10 million in liquid investments.

If half of the liquid investments are offshore, that is R5 million offshore. It may sound like a 50% offshore allocation, but it represents only about 17% of the person’s total R30 million wealth.

This is why the offshore percentage shown on one investment statement can be misleading.

The first question should be:

How much of my complete financial life is already dependent on South Africa and the rand?

Offshore investing is not only about the rand

A weaker rand may increase the rand value of foreign investments. A stronger rand may reduce it.

But currency should not be the only reason for investing offshore.

The main reasons normally include:

• Access to a much wider range of companies and industries
• Diversification between countries and currencies
• Reducing dependence on one economy
• Matching future foreign expenses
• Protecting against concentration in a South African business or property
• Creating flexibility for family members who may live, study or work abroad

Offshore investing should form part of a long-term plan rather than being treated as a short-term currency trade.

How much money will you need in South Africa?

Before transferring money offshore, calculate what must remain available locally.

This may include:

• Regular living expenses
• Emergency reserves
• Tax payments
• Property expenses
• Business commitments
• School and university costs
• Planned purchases
• Retirement income
• Money that may be needed within the next few years

A person who requires regular rand income should not place too much short-term capital into volatile offshore investments.

The money needed soon should generally be held in a suitable form and currency for that need. Long-term capital can then be invested more globally.

Where will the money eventually be spent?

The currency of the future expense matters.

If your children may study overseas, you travel regularly, intend to buy foreign property or expect part of your retirement spending to occur abroad, it may make sense to build assets in the currencies in which those expenses will arise.

If almost all future spending will remain in South Africa, more local income-producing assets may be needed.

The aim is not to predict which currency will perform best next year. It is to reduce the risk that your assets and future expenses move in completely different directions.

What can you transfer offshore?

South African resident individuals aged 18 and older currently have a R2 million single discretionary allowance per calendar year. This may be used for legal purposes abroad, including investment purposes, without a Tax Compliance Status PIN for the allowance itself.

A further R10 million foreign capital allowance per calendar year is available, subject to the applicable SARS tax-compliance and authorised-dealer requirements. Larger transfers may require further approval and verification.

These are transfer limits and processes. They do not tell you how much of your portfolio should be offshore.

The fact that you are legally permitted to transfer an amount does not mean transferring the full amount is automatically appropriate.

Offshore does not mean outside the South African tax system

South African tax residents are generally taxed on their worldwide income, subject to exemptions, double-tax agreements and credits for certain foreign taxes.

Owning an asset offshore does not make the income or gain invisible to SARS.

The structure used can affect:

• Income tax
• Capital-gains tax
• Estate planning
• Reporting obligations
• Access to the money
• The administration of the asset after death
• The costs of the investment

The investment should therefore not be selected before the ownership and tax consequences have been considered.

Direct offshore or rand-based offshore?

South Africans can obtain foreign exposure in different ways.

A rand-based offshore investment is generally made through a South African product or fund that invests internationally. The investor contributes and normally withdraws in rands.

A direct offshore investment involves converting rands into foreign currency and investing through an offshore account, policy or platform.

Neither route is automatically better.

Rand-based offshore investments may be simpler for smaller amounts and local income needs. Direct offshore investments may provide greater currency flexibility, access to a broader investment range and direct ownership of foreign assets.

The correct route depends on:

• The investment amount
• The required currencies
• Tax
• Estate planning
• Access needs
• Costs
• The intended beneficiaries
• Whether the investor may later leave South Africa

A practical way to decide

Instead of choosing an offshore percentage first, work through the decision in this order:

1. Calculate your complete net worth

Include the business, properties, retirement funds, investments, cash and offshore assets.

2. Separate short-term and long-term needs

Identify what may be needed within the next three to five years and what can remain invested for longer.

3. Measure your existing South African exposure

Include assets that do not appear in your investment portfolio, especially businesses and properties.

4. Identify future foreign-currency expenses

Consider travel, education, children living abroad, foreign property and possible retirement plans.

5. Decide on a long-term strategic allocation

Set a target based on the family’s risks and goals, rather than changing the allocation whenever the rand moves.

6. Choose the correct investment and ownership structure

Consider the tax, estate, access and administration consequences before implementation.

7. Move towards the target sensibly

A phased investment may reduce the risk of making the entire currency decision on one day. However, phasing in is not always better, especially where the current portfolio is severely concentrated.

So, what is the correct percentage?

For some families, 30% offshore may be too little.

For others, 70% may leave too little local liquidity and income.

A business owner whose wealth, income and property are all tied to South Africa may need a larger percentage of their liquid investments offshore. A retired person who relies heavily on rand income may require a different balance.

The answer should be based on:

• Your total balance sheet
• Your local and foreign expenses
• Your investment period
• Your ability to accept market and currency movements
• Your tax position
• Your estate plan
• The purpose of the money

The goal is not to remove all South African exposure.

The goal is to avoid being unnecessarily dependent on one country, currency, business or market while still keeping enough money available for your life in South Africa.

*This article provides general information and does not constitute personal investment, tax, exchange-control or legal advice. Offshore rules and tax treatment may change, and individual advice should be obtained before transferring or investing funds.*