Tax treatment of different types of international investments

Before investing offshore, you have to decide whether you want to invest directly offshore by using your discretionary tax allowance, or whether you want to invest indirectly by using a rand-denominated offshore fund. One of the big advantages of investing directly offshore is the fact that you do not pay tax on the currency gain over the period of the investment. Let us illustrate with an example:

You invest R100 000 when the dollar/rand exchange rate is $1/R10 directly into the XYZ world equity unit trust fund when the fund trades at $1 per unit. So you convert your R100 000 into $10 000 and buy 10 000 units, ending up with an investment of $10 000. Ten years later you sell your XYZ world equity fund investment when the dollar/rand trades at $1/R20 and the value per unit has increased to $5, realizing $50 000. When you convert you investment back into rand you get R1 000 000 ($50 000 x R20)

Because you made a direct dollar investment, you will be taxed on the dollar gain translated back into rands on date of sale. So the dollar gain was $50 000 – $10 000 = $40 000 and the $/R exchange rate was $1/R20 = R800 000 profit.

If you invested in the rand-denominated XYZ world equity unit trust fund, you will pay tax on the profit made from the fund as well as the currency profit. You invested R100 000 and sell for R1 000 000 so you made R900 000 taxable profit.

At the end of the day, with the current 40% inclusion rate of any capital gains made and a tax rate of 45%, you can pay up to R18 000 more in taxes just because you didn’t invest directly offshore.

It is important to note that due to personal circumstances, it might not be in your best interest to invest directly offshore and that the investment via a rand-denominated fund might suit you better. The ultimate goal is to get the offshore exposure if your personal investment plan requires it, no matter the vehicle.

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