Unpacking the enigma around offshore starts with one simple certainty; nothing in the South African Income Tax or Reserve Bank regulations prohibits South Africans from opening a bank account, investment account or setting up an offshore trust.

Many South Africans are feeling very uncertain about going offshore with their money, and understandably so. The spread of Covid-19, the economic forecast for South Africa (and also the rest of the world) and the Rand’s weakening value is enough to make any South African jittery and anxious about investing; not just locally, but also abroad. However, exposure to international assets is essential for the following reasons: it provides protection against the depreciation of the Rand, it helps to diversify investments and it allows access to a greater range of opportunities to invest in.

With all the complexity around moving wealth offshore, the real brainteaser for most is how to do it as quickly and cost effectively as possible and at what stage do I need to consider setting up an offshore trust.

  1. Offshore bank and investment accounts

We are finding that many South Africans have international transactional needs for both business and personal reasons, yet some are only aware of one-dimensional foreign currency accounts, often referred to as CFC accounts. This type of account allows the account holder to manage foreign receipts and payments through their local bank, but it is all subject to Exchange Control regulations.

In comparison, the multiple benefits of having an offshore bank account enable South African accountholders to conveniently receive payment for work done outside of the country, make international payments and to access international funds by way of a debit or credit card.  Most importantly, the general rule is that if the income was earned abroad while the South African resident was physically outside of the country, the income can be retained offshore. From here the funds can be transferred to a variety of different investment accounts also based offshore.

While there may not be any tax liability in the jurisdiction where the account is being held, accountholders will usually still be taxable in South Africa for any interest or capital gains that is earned on the account. The tax you may be required to pay depends heavily on the way you choose to invest and the type of investment account. Generally, the interest or gains realised need to be included in your taxable income for the year even though these are earned offshore because we are taxed on our worldwide income in South Africa.

Offshore bank or investment account(s) also need to be declared. The tax authorities in jurisdictions where the accounts are held, may have signed up for Common Reporting Standards (CRS).   The account details, balances and interest earned will automatically be shared with South African tax authorities and therefore, the account is not confidential by any means.

Although your details may not be confidential, your money will remain outside of South Africa.  In terms of de-risking wealth, it is a completely legal and acceptable solution to escape the volatility of the rand and to diversify your investments.

When exploring the benefits of opening an offshore account, the key is to choose your preferred offshore banking institution by taking into consideration the minimum balance requirements, transactional fees, reputation and jurisdiction. Some banks require face-to-face meetings with the account holder while others are comfortable to work through a licenced service provider like Sovereign Trust, in which case, a face to face meeting might not be required.

Offshore investment companies usually do not require a face to face interview, but an introduction by a regulated financial advisor might be required before an account can be opened with their company. Annual platform and trading fees should also be considered.

  1. Trust accounts

At what point should you consider setting up a trust to house the funds in your offshore bank or investment account and why?

We will start with answering the “why”. If your intention is to achieve any or a combination of the goals listed below, setting up a trust and investing in the trust’s name, becomes an option:

  • Protect your assets and preserve a legacy for future generations;
  • Protect your and your beneficiaries’ assets from creditors or claims as a result of relationship breakdowns;
  • Look after the needs of minor or disabled beneficiaries (special trusts);
  • Ensure your beneficiaries benefit from an asset that cannot be easily subdivided such as a holiday house or farm;
  • Separate personal capital assets from business and trading assets; and
  • Provide for dependents and relatives who are incapable of managing their money or taking care of their own affairs.

To ensure that setting up an offshore trust is a feasible exercise, you need to consider the annual trustee fees (which will depend on the jurisdiction, the type of trust and also the activity levels of the trust), the amount available to invest as well as the possible returns that can be achieved. As an absolute minimum requirement, the return should cover the annual trustee and other annual costs associated with the trust and investment.