WHEN DIRECT INVESTING ISN’T AN OPTION By Wayne Sorour, Head of Old Mutual International: Sales & Distribution It would be misguided to compare direct and indirect offshore investment mechanisms on the same scale. Some financial vehicles, such as trusts, along with specific individuals, don’t actually have the option of going the direct route when it comes to investing money offshore. While direct offshore investing is largely the preferred choice – as it allows investors to factor out rand devaluation, offers better tax outcomes and allows a choice of whether to bring money back to South Africa or keep it in the jurisdiction it resides – for many investors, indirect offshore investing may be the most sensible and accessible route. For instance, business owners who want to invest directly are restricted by legislation. This stipulates that commercial entities can only take capital offshore if the company is registered in the same jurisdiction and operating in the equivalent sector. Investors with assets in trusts, on the other hand, run the risk of exposure to significant taxation if they used the wrong offshore vehicle. A local trust, formed and domiciled in South Africa, cannot invest offshore directly. INDIRECT OFFSHORE EXPOSURE A more sensible option for these types of investors is therefore to take their money offshore through a feeder fund or private asset swop facility. There is a lot of terminology around indirect investing, including terms like randdenominated investing, asset swops or feeder funds, which, for the most part, are the same thing. With a feeder fund, which is essentially a rand-denominated unit trust fund, asset managers use their own asset swop capacity to invest in global assets on behalf of investors. These feeder fund options are limited to the fund range of the particular asset manager, which is why we, at Old Mutual International, advise high net worth clients rather to invest using what we call a private asset swop facility. In doing so, we can invest in the same assets we would for an individual investing directly offshore, and structure a diversified, bespoke investment portfolio. Using a private asset swop facility has tax benefits, in that the investment is taxed in US dollar returns only, whereas a feeder fund is taxed in rand. In 8
In many cases, indirect investment vehicles available to investors can offer the same diverse exposure to offshore markets with many of the same benefits. other words, if you have a US dollar return of 10% in a global equity fund, in a private asset swop facility you will be taxed on this 10% alone. Were you to be invested in a rand-denominated fund and it devalued by 10%, you would be taxed on the 10% US dollar returns and lose on the devaluation of the rand. Another instance in which individuals would choose to invest through an asset swop facility is to avoid withdrawing money from a trust where they would be liable for estate duty. With a private asset swop, investors can invest over and above the foreign investment allowance of R10 million per person per annum, and the R1 million discretionary allowance. When an investor has exceeded their R11 million threshold, they can take out an asset swop to get extra offshore exposure. At the end of the year, they can disinvest from the asset swop and use their R10 million allowance again the following year. WHY GO DIRECT OFFSHORE? If you have the necessary means and are in a position to do so, direct investing is the right option if you want to hedge against political instability or make future provision for your children to ” study abroad. In these cases investing directly and having money available in the relevant jurisdiction is an advantage. If you believe the rand is going to decline in the future, why include the rand devaluation in the equation when you don’t need to? However, direct investment, while generally being the preferable means of investing offshore, is not for everyone. In many cases, indirect investment vehicles available to investors can offer the same diverse exposure to offshore markets with many of the same benefits.