How To Invest Offshore And Pay Zero Tax

With the February 28th deadline for using your annual R33,000 tax-free savings allowance looming, Iain Anderson, our Head of Investments, gives the low-down on why it may be a good idea to invest this tax break offshore – and how to do it with ease.

Let me start by saying I’m not negative about South Africa’s long-term prospects and I would never encourage disinvestment in this country – quite the opposite. What I do always encourage, though, is portfolio diversification – that old “don’t put all your eggs in one basket” adage.

The South African stocks market is quite undiversified compared to others – if a dominant player like Naspers drops on the JSE, there’s a ripple effect. This makes putting 100% of your investment into the local market risky.

There are of course risks in offshore markets, too, like currency fluctuations you are exposed to. But broadly speaking, if you invest in a wider range of stocks and themes, you reduce your exposure to risk.

Having a portion of your portfolio invested offshore is a great way to diversify, and now’s a great time for South Africans to do just that for a few reasons. South Africa is facing a lot of negative headwinds at the moment – at least in the short term – and yet the Rand has been quite strong since the start of the year, so it is an opportune time  to get some offshore exposure.

We’re not the only economy that’s suffered, though. Globally, 2018 was the worst year for equities since the economic meltdown of 2008. This makes investing in foreign markets relatively cheap for South Africans right now, and for long-term investors it’s usually a smart move to get in when the markets are down.

In addition, the US Federal Reserve has hiked interest rates nine times since the 2008 crash and has now indicated they’re going to slow down. This will buoy global risk assets. I’m not by any means saying the global market downcycle is over, but at Sygnia we believe in market cycles – there will be upcycles ahead so you want to get in there while you can. 

**Offshore the easy way

There’s a perception that only big rollers with millions can play in the offshore market. While that may have been the case many years ago, nowadays it’s easy for the Average Joe to play too.
**

The traditional way of investing offshore is to open an offshore account and/or have an offshore broker, both of which can be very costly and usually not worth it if you don’t have a million or more to invest. New products on the market have sidestepped all of this and made it easy for the average South African to invest offshore.

Perhaps the easiest way is to invest in a South African unit trust, which in turn invests in international markets. No offshore account or broker needed.

Of course I’ll use Sygnia’s Skeleton International Equity Fund of Fund (SSIEFF) as an example. It’s a South African unit trust that invests in countries and economies all over the world, so it has broad exposure to equity markets, including emerging markets. 

You don’t have to jump through any international regulatory hoops to invest in these types of offshore investment vehicles. And it can be very cost effective – fees for the SSIEFF are only 0.65%. The less the fees, the higher your return on investment.

There are a number of options like this to choose from. If, for example, you want a more high risk – but potentially more high growth – offshore investment vehicle, then you could consider something like Sygnia’s 4th Industrial Revolution Global Equity Fund. This fund only invests in stocks for new technologies and innovations – we’re talking everything from 3D printing to space travel. Fees for this fund start from 0.70%.

Whichever low-fee offshore investment vehicle you choose, the results are the same: a diversified portfolio with broad exposure globally, at low cost.

Sound good? It gets better…

Offshore the tax-free way

South Africans are allowed to invest a total of R33,000 per year (maximum lifetime contribution of R500,000) into a tax-free savings account (TFSA). 

A TFSA is not a single, standardised investment vehicle. It can be money market or fixed term bank account, a JSE-listed exchange traded fund, or a unit trust that invests offshore. You see where I’m going with this…

That’s right, you can to take your annual tax-free savings allowance and invest it into a unit trust that invests offshore and pay zero tax on it, locally and abroad.

There is absolutely no limit to how much your TFSA investment can grow. So if you choose an incredibly well performing fund, you could double, triple or even quadruple your savings with no tax ramifications. That’s how a TFSA can really work for you.

And it doesn’t have to be a single TFSA. As long as you don’t exceed the annual limit of R33,000, you could have two or more TFSAs. For example, you could split your R33,000 a year between a low-risk investment and a high-risk investment. Or invest half offshore and half locally. There are plenty of options to play around with.

A TFSA offers further flexibility in that you don’t have to invest monthly – you can choose to invest your tax-free savings allowance as a lump sum once a year, as long as you do it before the end of the relevant tax year. 

February 28th is around the corner. Choose wisely.