‘Offshore’ shifts with new currents
07 August 2012
Posted by: SAIT Technical
By Prof Matthew Lester
IN THE late 1990s, South Africans discovered offshore investments and for a while they were quite the rage.
Then, in 2000, the Nasdaq cracked and many investors lost their boots. So they brought it all back to South Africa and chased the residential property market, until that cracked in 2008.
Today, many are too frightened to invest in anything but interest-bearing accounts and guaranteed-return products. But with the repo rate sitting at 5.5% and interest receipts fully taxable, their investments are going nowhere.
Take R100 on the day Jacob Zuma came to power in May 2009. If a 30% tax rate is applied to interest receipts over three years, that should be worth about R115 today. That's pretty shabby if it should have grown to R119 to keep pace with inflation. By contrast, R100 placed on the JSE All Share index (Alsi) would be worth about R160 today, net of capital gains tax at 7.5%.
Over the three years, the Alsi has outperformed the Dow, the FTSE, and most other indices, and many South Africans have reverted to a "local is lekker” investment strategy. Hence there is little demand for the R4-million offshore investment allowance.
The balance of payments current account developed a black hole in the closing years of Reserve Bank governor Tito Mboweni, but it is a lot better under Gill Marcus. And the political concerns that sent the rand tumbling every time an ambulance broke down outside Tuinhuys seem to be far behind us.
Why bother with offshore investments? They are complicated and expensive to administer. And even the dividends are taxable.
Investment is not about how much one makes but rather about how much one did not lose. And one can never say the rand is bomb-proof. The risk of a currency decline is as much a threat to my retirement as the security of my home.
There is a concession in the form of a new regime for the taxation of foreign dividends. It's all very complicated and will surely fail more than a few CA(SA) candidates in forthcoming examinations.
But the important point is that foreign dividends now have the same profile for the investor as local dividends and cannot be taxed at more than the 15% dividends tax rate.
Even foreign withholding tax on dividends can be deducted from the South African tax liability.