Since these funds are already ‘externalised’, as they are to be received in an Australian bank account, you are in a fortunate position to build a robust 10-year global strategy without the usual exchange control hurdles.
However, before selecting underlying assets to invest in, we must address the immediate regulatory requirements and the structural choices available to you.
1. Immediate regulatory requirements
As South African tax residents, you are taxed on your worldwide income and the South African Revenue Service (Sars) requires full transparency regarding foreign assets.
- The receipt: Under current rules, you do not need approval from the South African Reserve Bank to keep a foreign inheritance offshore. You are legally entitled to retain these funds in Australia or move them elsewhere globally.
- The declaration: On your next tax return (ITR12), you must declare the inheritance in the ‘Donations/inheritances’ section. This is a non-taxable receipt (capital), but it clears the money with Sars.
- Asset disclosure: You must also list the value of the Australian account in the ‘Foreign assets’ section of your return. This ensures that if you eventually bring the money back, Sars knows the source was legitimate, clean capital and not undeclared foreign income.
2. Choosing an investment vehicle
Keeping funds in a standard Australian bank account for 10 years is generally inefficient due to low interest rates and high SA tax on foreign interest.
You are free to move these funds to an international investment platform instead and domicile them in any major global currency. Here you have two primary vehicle options.
Discretionary unit trust
A discretionary unit trust is an open-ended investment vehicle that allows you to hold selected global funds directly in your own name(s). Its primary advantage is maximum liquidity, as you can access your capital at any time without legislated restriction.
The following factors are critical when considering this route:
- Investment universe: The breadth and variety of available investment funds will be determined by your chosen investment platform.
- Tax administration: Tax reporting remains your personal responsibility, which is a vital consideration during the due-diligence phase. Some international platforms provide more comprehensive integrated reporting than others, which can significantly simplify your annual filing.
- Sars obligations: As a South African tax resident, you must declare all forms of income generated within the account – including foreign interest, dividends, and any realised capital gains – as part of your personal income tax filing.
Offshore endowment
An offshore endowment is a specialised life-insurance-linked vehicle designed to house underlying global investments. It functions as a ‘tax wrapper’, meaning the investment platform assumes the responsibility for calculating, collecting and paying all relevant taxes to Sars on your behalf.
This structure offers several distinct advantages and a few important constraints:
- Taxation: Tax is applied within the policy using the ‘five-fund’ approach. For individual policyholders, income is taxed at a flat rate of 30%, and the effective capital gains tax (CGT) rate is fixed at 12%. This can be particularly efficient if your personal marginal tax rate exceeds 30%.
- Legislated restriction period: The vehicle is subject to an initial five-year restriction period. During this time, access to your capital is limited:
– The one-withdrawal rule: You are generally permitted only one withdrawal during the first five years.
– The legislated limit: This withdrawal is capped at the lesser of your total contributions plus 5% compound interest per annum, or the current market value. - The ‘120% Rule’: It is important to manage any future contributions carefully. If you add funds in a single year that exceed 120% of your contributions from the previous two years, a new five-year restriction period may be triggered for the entire investment.
Beyond this initial five-year window, the endowment becomes fully liquid and accessible as needed. Given your 10-year horizon and the fact that you do not require the capital now, this vehicle may offer notable administrative and tax-planning advantages.
3. Estate planning considerations
At your stage of life, the ‘how’ of holding assets is often more important than the ‘what’. There are three critical factors you need to address to ensure your 10-year strategy doesn’t become a burden for your heirs:
- Situs tax (foreign death duties): Direct shares in the US or UK can trigger substantial taxes upon death. Using an undertakings for collective investment in transferable securities (Ucits)-structured unit trust or an offshore endowment generally mitigates this risk. In these instances, because you hold units in a fund or a policy registered in a tax-neutral jurisdiction (such as Ireland or Guernsey), the asset is not deemed to be ‘situs’ to the US or UK.
- Foreign probate: This is the legal process of ‘proving’ a will in a foreign court so that executors can access and distribute assets held in that jurisdiction. This process can be expensive and time-consuming. Before committing to a platform, you should confirm whether they accept a South African will and letters of executorship. While some modern platforms have simplified their requirements to recognise South African documentation, this remains a critical due-diligence step. An endowment avoids this entirely by allowing you to nominate a beneficiary for proceeds.
- Continuity: Discretionary offshore accounts are often frozen until the foreign probate or local estate is settled, which can leave a surviving spouse without access to capital for a significant period. An endowment can be structured as a joint-life policy, allowing the surviving spouse uninterrupted access to the capital.
4. Asset allocation
Determining the specific asset allocation – how much to put into global equities, bonds, or property – is a solution that requires a deep understanding of your personal financial position. However, it is vital to remember that this AUD$120 000 does not exist in a vacuum.
Your offshore strategy should be viewed as a complementary component of your total wealth.
For instance, if your South African portfolio is heavily weighted toward local equities or property, you might use this offshore capital to gain exposure to global sectors that are underrepresented on the JSE, such as technology, healthcare, or global consumer services.
The objective is to ensure your total portfolio is appropriately diversified across different currencies, jurisdictions, and industries to align with your long-term objectives and required outcomes.
For a 10-year horizon, both the discretionary and endowment vehicles have clear merits. A discretionary unit trust offers simplicity and liquidity and, provided you utilise Ucits-structured funds, you can effectively avoid the burden of foreign Situs tax.
An offshore endowment provides a more efficient estate planning path and capped tax rates, which can be a significant advantage if you are comfortable with the initial five-year liquidity restriction.
Ultimately, without a granular view of your broader financial plan, [I can only advise that it] would be prudent to carefully consider:
- The choice of investment platform and its reporting capabilities;
- The specific estate and tax implications for your unique circumstances; and
- The most appropriate asset allocation to ensure this capital works in harmony with your total portfolio.
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