Monday, June 11, 2012

Offshore investing gets easier for South Africans

For some South Africans, getting tax clearance to take your money overseas has been a bit like trying to move through airport security with a chicken strapped to your head.

This has all changed, and not a moment too soon – the case for investing abroad has rarely seemed so solid.

Government recently issued a circular announcing that you can now invest R1m/year outside South African borders without having to obtain a tax clearance certificate.

Before the announcement, South Africans had an annual “single discretionary allowance” of R1m to take out of the country, which could only be used for travel, study, alimony and child support as well as for donations. You were then also allowed to take R4m to invest abroad, but you needed to have tax clearance from the SA Revenue Service.

But now you may also use the single allowance to invest abroad – without tax clearance.

This has been welcomed, with some financial advisers claiming that it was “virtually impossible” to get tax certificates for some clients.

There have been complaints about constant changes in the way applications have been processed and that SARS often decided not to issue the certificate because of minor technicalities. In response, a number of small outfits have sprung up, promising to assist investors in getting clearance certificates.

Gregg Sneddon of The Financial Coach in Cape Town, says SARS sometimes seemed to require that applicants had to have the money they were planning to invest abroad actually sitting in their bank account - they could not move it from another investment.

This was part of anti-laundering efforts, says Sonja Frank, a legal and tax adviser and director of Exceed Trust. SARS therefore requires extensive source documents - including property transaction contracts and transfer documentation - to make sure it knows where the money comes from. If a client’s tax returns were not up to date this could also delay getting tax clearance.

And the process for those wanting to start a business abroad - proving where your money will go, including premises and other expenses - could be particularly onerous, says Frank.

She thinks that the new regulation will make a big difference to those wanting to invest abroad.

So, the world is your oyster - and if you haven’t done so already, you should get a tiny fork and some Tabasco, and dig in.

There seems to be bargains elsewhere, with valuations in the local market on the expensive side. The local market is trading at a price-to-earnings ratio (which tells you how expensive a market is) of more than 13 times - in line with its long-term average.

But US stocks are also trading at 13 times - significantly cheaper than its historical average of 16. Other emerging markets like Brazil, Russia, India and China are also trading at lower ratios than SA.

Also, the rand is looking shaky. The currency has already lost 13% in the past year to the dollar, and 22% to the euro. Any further weakening in the rand will give you an instant profit on your overseas investments. With inflation ticking higher in SA, no sign of an interest rate hike (which will make the rand more attractive to overseas investors looking for yield) and amid continued nervousness about the eurozone (SA’s biggest trading partner), it’s expected that the local currency may come under further pressure in the future.

As a general rule of thumb, experts recommend having at least 30% of your portfolio invested outside of SA.

“Offshore assets are included in investment strategies as they behave differently to local assets and thus offer diversification benefits. Investing offshore also allows access to opportunities that are not available in SA - investing in Google or Microsoft for example,” says Jonathan Brummer, Financial Planning Coaching Support Consultant at acsis.

Another reason to diversify is that the local market is very resource-heavy, a sector, which may face a bit of a rough ride, according to some. Allan Gray’s chief investment officer, Ian Liddle, recently questioned the sustainability of commodity prices and mining company profit margins, which are mostly substantially higher than their long-term averages. “For example, the 21st century boom in iron ore prices has been of a similar magnitude to the Nasdaq tech bubble in the Nineties, the Japanese stock market bubble in the Eighties and the gold bubble in the Seventies.”

If you do want to diversify abroad, Sneddon likes direct investments in global unit trusts – which are cheaper than going though platforms like Glacier, which adds more costs and layers. Institutions like Ashburton, Investec and Templeton, which operate in SA and are approved by the Financial Services Board, offer offshore unit trusts to local investors.

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