Direct offshore investment or via a feeder fund?

We have been writing about the importance of offshore investment for quite some time. One of the daily newsletters we read, recently published an article about the difference between using rand-denominated feeder funds versus direct offshore investment.

The article is an easy read and clearly illustrates the difference in the capital gains tax treatment of the two options respectively. In short, if you believe the rand will weaken against the dollar over time, direct offshore investment is better for CGT purposes. Here is a snippet of the article and a link to the original:

“To date, many investors have favoured rand-denominated feeder funds because of the perceived complexity of applying for tax and Reserve Bank clearance to invest offshore directly. However, for discretionary investors (as opposed to investing via a retirement fund or living annuity product wrapper) the tax consequences favour investing directly offshore, not via a rand-denominated feeder fund, with the obvious exception of tax-free savings accounts. This is because, when you disinvest from an offshore fund, i.e. a US dollar-, pound- or euro-denominated fund, you calculate any capital gain in the applicable foreign currency (dealing currency) and multiply that gain by the rand exchange rate on the date of disinvestment.[1] So, if your initial investment of US$10 000 has grown to US$20 000, your capital gain is US$10 000, which is then multiplied by the current exchange rate. Therefore, the rand/US dollar exchange rate at the time that you made the initial investment is irrelevant in determining your capital gain, i.e. you are not subject to capital gains tax (CGT) on any rand depreciation.”

Click here for the complete article.

offshore summary

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