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How to use offshore allowances to mitigate your investment risk as global uncertainty grows

South Africans, already beset by ongoing economic and political uncertainty at home, awoke last Friday morning to find that global uncertainty had also increased significantly in the wake of the US killing of a top Iranian military general and the subsequent fall-out (retaliatory missile attacks, much sabre-rattling, and the possibility of yet another war in the Middle East). Western interests could well come under threat and we have already seen some turmoil in world markets – not to mention an increase in the oil price.

Given the reality that whenever the world sneezes, the South African economy catches a cold, this makes diversifying your investment portfolio and seeking offshore safe havens for your hard-earned assets even more important. Fortunately, with the correct advice and assistance, taking money out of the country for these purposes has become easier than many people believe. 

A tax-compliant individual can take R11-million a year offshore relatively simply and even increase this by several million more if they are married and have adult children. There are few restrictions on how such funds are used and astute investors can consider opening a foreign bank account, buying property in a stable country, taking advantage of international investment opportunities unavailable in South Africa via the JSE or other local organisations, or simply mitigating their currency risk. 

R1-million via the SDA

Using the Single Discretionary Allowance, often referred to as the SDA, an SA resident can send R1-million out of the country annually without needing to apply for a tax-clearance certificate. It can be used for any legal purpose and many people use this to fund travel, study, an investment, or as a gift to someone living overseas.

If you’re married your spouse may do the same, which immediately doubles your SDA. Your children of adult age are also entitled to an SDA of R1-million. This makes an annual SDA of R4-million to R5-million feasible for many families. The funds can be taken out of the country in a lump sum or staggered over the course of the calendar year.

The only restriction for spouses and children is that they must have a South African tax number. Mercury FX can facilitate this process.

R10-million through the FIA

If you need more funds than what is achievable via the SDA, there’s a further R10-million available to individuals through the Foreign Investment Allowance (FIA). This requires a SARS tax certificate and, once again, Mercury FX can assist with the process. Turnaround time is usually a week or less, depending on the time of year.

These are yearly allowances and someone who took out, say, R11-million in 2019 may do the same again in 2020 with very little effort and administration involved.

What’s not allowed?

SARS doesn’t permit the allowances to be used within the Common Monetary Area countries of South Africa, Lesotho, Swaziland and Namibia.

They may also not be used to enter into transactions that create a loop structure, whereby the funds transferred offshore would be used to ultimately hold interests in assets located in the Common Monetary Area countries.

Similarly, the allowances cannot be re-introduced to South Africa as a loan to a Common Monetary Area resident. 

However, an unintended loop structure caused by your offshore fund manager investing in companies that, in turn, hold assets within the Common Monetary Area countries is allowed as the individual investor has no control over such investments.

Local unit trusts not affected

It’s important to note that an individual who is invested in a South African-based unit trust which invests a portion of its investments offshore will not have this counted as part of their offshore allowance. This is because unit trusts use the investment manager’s foreign allowance rather than the individual’s allowance. 

Taking more than your R11-million offshore

Wanting to take more than R11-million offshore? This becomes a far more complex undertaking and will require a special tax clearance from SARS. You will also need to have the approval of the Financial Surveillance Department at the South African Reserve Bank. In addition, it’s quite likely that you will need to motivate your application in some detail. 

If the amount you require is more than R11-million, but R22-million or less, you could rather consider using your R11-million allowance in, say, November/December of 2020 and then the following year’s R11-million allowance in January/February of 2021.

What’s the next step?

For large forex transfers it’s important to consult an expert, as mistakes can be hugely costly and difficult, or impossible, to rectify later. 

Mercury FX International will set up free-to-have multicurrency accounts capable of holding various currencies indefinitely. They can also offer better-than-bank exchange rates (around 2.5% better) to get an investor’s funds out of South Africa. In addition, they will assist with applications for tax clearance should you need to send out more funds than your allotted annual Single Discretionary Allowance of R1 million. As a trusted global currency specialist founded by South Africans in the city of London in 2007, Mercury FX International is regulated by both the South African Reserve Bank and the Financial Services Board (FSP No. 46875) and adheres to strict compliance, disclosure and anti-money laundering requirements. It offers individuals a fresh, secure alternative to the banks, with better FX rates and lower fees. DM


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