Investing globally: the why and the how. Tips from adviser to South Africa’s ultra-rich

If the international investment bug hasn’t bitten you, it soon will. The prediction from Johan van Zyl, who heads an advisory service for South Africa’s ultra-rich, is that we are going to become increasingly interested in what the investment world has to offer beyond our borders.

Although the sharp decline of our national currency is an obvious reason for looking elsewhere to generate returns, there are other good reasons to diversify internationally. For starters, the Johannesburg stock exchange is dominated by resource, financial and consumer companies – and there are so many other businesses that can deliver good returns.

But, before you start buying the shares of companies like Google and Facebook from your laptop in South Africa, think about your bigger investment picture, is Johan’s message here.  He gives a practical overview on the latest exchange control regulations, too. – JC

Investing globally: the why and the how

By Johan van Zyl*

While many of South Africa’s ultra-high net worth individuals are looking more closely at going global with at least a portion of their investment portfolio, and while the Rand’s sharp decline has been a recent catalyst, there are a number of sound reasons for taking a wider view of the global investment universe.

For one, the Johannesburg Stock Exchange (JSE) represents only around 1 % of the total global equity market measured by market capitalisation and is dominated by resource, financial and consumer companies. The local equity market is also highly concentrated, with BHP Billiton, SAB, Anglo American, Richemont and MTN representing 40% of the JSE’s total market capitalisation.

Investing globally provides the opportunity to reduce concentration risk by investing in other global companies and it also offers exposure to important sectors such as information technology, utilities, energy and pharmaceutical that are not widely available on the local stock market.

Also high on the agenda for many ultra wealthy families is wealth preservation and succession planning. Investing in foreign assets has the potential to enable a wider choice of instruments not only for growth and wealth preservation, but also for the management of risk through diversification and use of appropriate legal structures such as trusts or companies.

As globalisation has deepened, the trend toward looking abroad for diversification and growth is likely to increase. Many decisions will need to be made in connection with the size, composition and management of a global investment portfolio, but the first step will be ensuring availability of the requisite liquid capital for investment.

There are a number of options available today by which capital may be externalised and or remitted abroad due to more accommodative exchange controls. Among them are asset swaps, although increasingly less popular, which are available to individuals, companies and trusts through authorised service providers and do not require exchange control approval.

The capital applied to an asset swap allows an economic exposure to foreign investment assets; however, upon realisation of the investments, , the proceeds must be repatriated to the investor’s account in South Africa.

Another option available to local investors is the annual Foreign Investment Allowance (FIA) of R4m per year, which is available to individuals only. While no exchange control approval is required to invest these funds abroad, it is necessary to secure prior to any remittance being effected, a tax clearance from SARS, to which proof of available capital must be supplied. This is arguably the most flexible option as such capital may be used for any purpose, including loans to foreign trusts, and need not be repatriated.  The limitation for ultra-high net worth investors being the R4m cap per annum.

It is, however, possible to apply to the South African Reserve Bank (SARB) to externalise an amount in excess of the FIA, although it is advisable that these applications be appropriately motivated. It is also dependent on obtaining a prior special tax clearance issued by SARS after it has conducted relevant enquiries into the taxpayer’s financial position and related tax status.

It should be noted that amounts exceeding the FIA which are approved by SARB and SARS may not be on-lent to a foreign trust or other entity in terms of the prevailing SARB policy and thus form part of the individual investor’s estate. An investor that receives this special approval is also obliged to keep the SARB updated on an annual basis as to the value of the funds and where they are invested.

Emigration from South Africa also remains an option for individuals. The regulatory process for emigration is more onerous in terms of information and documentation required for submission to the Authorised Dealer (a role played by SA’s commercial banks) than an application to the SARB to take an amount in excess of the FIA abroad. However, the distinct difference in the case of emigration is that the funds, once externalised, fall outside the exchange control ‘net’ so there are no ongoing reporting obligations.

There is also no longer an exit charge being levied on an emigrant externalising any assets, although a capital gains tax liability still arises determined on the basis as if all assets of the emigrant, subject to certain exclusions, were sold at market value at the date of emigration. It is, however, important to keep the concept of a ‘failed emigrant’ in mind. This relates to a person who returns to South Africa within a period of five years after date of emigration. In this event, all funds held abroad at date of re-immigration to South Africa must be repatriated and the capital gains tax paid originally on emigration must be forfeited.

So, before deciding what investments to make abroad, the issue of how best to externalise funds needs to be contemplated together with what the most appropriate investment vehicle or structure might be, and what tax, exchange control and estate duty implications may arise.

Only once these structuring and exchange control impacts have been ascertained can one really begin to consider investing into the likes of Google, Nestle and Coca Cola.

* Johan van Zyl is Chief Executive Officer of Stonehage South Africa.