Four key considerations when taking money offshore

What to think about when moving your money.

SANDTON – Since 2000 there has been a dramatic change in how much money South African residents are legally allowed to transfer overseas. Fifteen years ago, individuals were only entitled to a lifetime allowance of R750 000, and that required a tax clearance.

As of this year, however, anyone can take R11 million out of the country every year. There is a R1 million discretionary allowance, which can be used without needing any clearance from the South African Revenue Service, and an additional R10 million allowance for which tax clearance is required.

Effectively, this means that for the vast majority of South African residents exchange controls are no longer an issue. This has opened up international investment markets and provided an opportunity to benefit from the diversification they offers.

Speaking at the Money Expo 2015 at the Sandton Convention Centre, Tim Powell, director at FX Capital, said that anyone wanting to take advantage of this opportunity must keep four important considerations in mind.

“If you are seriously thinking about investing offshore, the first thing you have to do is to be in a position to do it,” Powell said. “If you want to use more than your R1 million discretionary allowance, do yourself a favour and get the tax clearance, even if you are not going to use it right now.”

He said that while you might not want to buy dollars at R13 or pounds at R20 rand, you also don’t want to miss out if a buying opportunity does arise. If the exchange rate moves back to R12 or R12.50 it is better to have your tax clearance in place already to be able to move quickly.

Secondly, Powell said that you must also have somewhere to send the money.

“It might sound simple, but many clients come to us without having offshore bank accounts or having planned offshore investments,” he said. “If you are sending money overseas, you must have set something up.”

He added that while it is not that difficult to open an offshore bank account, it can be useful having someone to assist you. FX Capital therefore offers a service to its clients to help them set up an account overseas. Alternatively, Standard Bank and Barclays, through Absa locally, both offer offshore bank accounts to South Africans.

Powell said that the third, and perhaps most important consideration when sending money overseas is the cost involved.

“Costs aren’t entirely transparent in the banking system as far as I am concerned,” he said. “If you go through a bank the SWIFT fee and the commission will be set out, but the real cost is the exchange rate.”

He pointed out that banks will charge you a large spread on foreign exchange purchases. That is the differential between the prevailing rate and the one that they actually charge you.

“Firms like ours try to make that cost more transparent,” Powell said. “We agree on a spread with the client upfront so that you know what you’re in for.”

Finally, Powell advised investors to think about timing and hedging.

“The rand has a history of being very volatile, so you do get opportunities to buy at reasonable levels and you need to be in a position to do so,” he said. “Firms like ours allow you to put an order in so that when the exchange rate does reach a certain level, we can execute a purchase for you.”

For instance, you might not want to buy dollars at the current rate of R13, but you feel that R12.50 would be a buying opportunity. You could therefore put an in instruction to purchase a certain value of foreign exchange if and when that rate is reached.

Hedging is slightly more sophisticated, but also offers an opportunity to get rates that you consider more attractive.

“You might have a future commitment and want certainty on the rate that you will pay, or you might see a buying opportunity come up and you are unable to take advantage because your money is tied up elsewhere,” Powell said. “Firms like ours will allow you to set that rate through a futures contract. So you settle that contract at a later date, and whether the rate is higher or lower doesn’t matter. You have the certainty of getting the rate you see now.”