July 13, 2024

‘Tax-free’ with direct foreign investments – PWM

South Africans are liable for tax on their worldwide income.

This includes foreign interest and dividends as well as the capital gains generated when selling a share or underlying funds at a profit.

Unless legislation or a double taxation agreement specifies otherwise, one could be taxed more heavily than expected.

However, the problem only arises at the death of the client when the offshore estate must be dealt with, and estate duty becomes payable. 

In certain jurisdictions, this can be as high as 40 percent. The process can also be expensive and may prolong the settlement period.

During this time, the investment is usually not accessible to beneficiaries, which can cause further trauma and financial stress.

To address these issues, several investment houses in South Africa have developed a platform within a policy.

The benefit of this is consolidated reporting with access to a wide variety of fund managers around the world. Furthermore, management costs are usually lower in most cases.

With this product, insurers pay all the taxes on your behalf. Therefore, you do not have to report to the South African Revenue Service (SARS) on dividends, capital gains, exchange rate gains, or interest earned.

In accordance with section 29A of the Income Tax Act of 1962 (Act 58), the insurer pays 12 percent capital gains tax and 30 percent tax on interest and other income.

Compare this with the maximum rate of 45 percent payable by individuals in SA.

There is usually an option to have more than one policyholder, meaning that the investment will continue to exist even if one of the life insureds die. Alternatively, beneficiaries can be appointed.

In these cases, the investment is thus never part of the estate process, and the associated delays are eliminated. There are also no executor's fees payable, but the investment is considered a deemed asset for estate duty purposes.

Expensive estate administration costs and SITES tax are avoided because foreign assets in the policy are exempt from this tax and process.

Such platforms are the best practice for making direct foreign investments, but a tax clearance is required should you take more than R1 million abroad, per year.

This product is also accessible to companies and trusts, with the requirement that funds must be repatriated to South Africa. This is facilitated through an asset swap transaction.

The most important aspect of the product is that, in the case of an individual, there is no obligation for the funds to return to South Africa.